Keynes and the Phillips Curve: A Suggested Reinterpretation
29 Pages Posted: 24 Feb 2013 Last revised: 7 Mar 2013
Date Written: February 23, 2013
Phillips and Keynes had very different ideas on the relationship between unemployment and inflation. While the former saw a direct trade-off between the two, the latter saw an indirect cyclical relationship intermediated by liquidity preference. A horserace between mathematical specifications of the two models finds that Keynes’ model more accurately models inflation even during the Bretton Woods period and that it model continues to model inflation today with significant accuracy. This indicates that inflation is, contrary to the implications of the Phillips curve, a monetary phenomenon. An analysis of Keynes’ model illuminates improved liquidity management in the U.S. economy in recent decades and illustrates problems of monetary policy with near-zero interest rates.
Keywords: Phillips Curve, Liquidity Preference
JEL Classification: E12, E31
Suggested Citation: Suggested Citation