Economics Phillips Curve Questions Medium
The Phillips Curve is a concept in economics that describes the relationship between inflation and unemployment. It was first introduced by economist A.W. Phillips in 1958, who observed an inverse relationship between wage inflation and unemployment rates in the United Kingdom.
The new neoclassical synthesis Phillips Curve with staggered price-setting is an extension of the original Phillips Curve that incorporates the idea of price stickiness in the short run. This means that prices do not adjust immediately to changes in demand or supply conditions, leading to a lag in the adjustment process.
In the context of the new neoclassical synthesis Phillips Curve, the relationship between inflation and unemployment is still present, but it is influenced by the behavior of firms in setting prices. The staggered price-setting assumption implies that not all firms adjust their prices simultaneously, but rather they do so at different times.
When the economy is at full employment or experiencing low levels of unemployment, firms may have more pricing power and can increase their prices without losing customers. This leads to higher inflation rates. On the other hand, when the economy is in a recession or experiencing high levels of unemployment, firms may face weaker demand and have less pricing power. As a result, they may lower their prices to attract customers, leading to lower inflation rates.
The new neoclassical synthesis Phillips Curve with staggered price-setting suggests that the trade-off between inflation and unemployment is not a permanent one. In the short run, there may be a negative relationship between the two variables, but in the long run, this relationship is not sustainable. This is because individuals and firms adjust their expectations and behavior based on past experiences, leading to changes in the Phillips Curve over time.
Overall, the concept of the Phillips Curve in the context of the new neoclassical synthesis with staggered price-setting highlights the dynamic nature of the relationship between inflation and unemployment, taking into account the role of price stickiness and the adjustment process in the economy.