What is the relationship between inflation and the Phillips curve in the long run?

In the long run, the relationship between inflation and the Phillips curve is often described as a vertical or nearly vertical line. This implies that there is no trade-off between inflation and unemployment in the long run. The Phillips curve, which shows the inverse relationship between inflation and unemployment in the short run, is based on the idea that there is a temporary trade-off between the two variables. However, in the long run, this trade-off disappears due to various factors.

One of the main reasons for the vertical Phillips curve in the long run is the concept of the natural rate of unemployment. The natural rate of unemployment refers to the level of unemployment that exists when the economy is operating at its potential output or full employment. In the long run, the economy tends to gravitate towards this natural rate of unemployment, which is determined by structural factors such as demographics, labor market institutions, and technological progress.

As the economy approaches full employment in the long run, any attempt to reduce unemployment through expansionary monetary or fiscal policies will only result in higher inflation. This is because the economy is already operating at its maximum capacity, and any increase in demand will lead to upward pressure on prices rather than creating more employment opportunities.

Additionally, in the long run, inflation expectations play a crucial role in determining actual inflation. If individuals and businesses expect higher inflation, they will adjust their behavior accordingly, leading to an increase in wages and prices. This phenomenon is known as the adaptive expectations theory. As a result, any attempt to reduce unemployment below its natural rate through expansionary policies will only lead to higher inflation expectations and ultimately higher inflation.

In summary, the relationship between inflation and the Phillips curve in the long run is a vertical or nearly vertical line, indicating that there is no trade-off between inflation and unemployment. The economy tends to gravitate towards its natural rate of unemployment, and any attempt to reduce unemployment below this level will only result in higher inflation. Additionally, inflation expectations play a crucial role in determining actual inflation in the long run.