ECON 304 Lecture Notes - Lecture 1: Paul Samuelson, Phillips Curve, New Keynesian Economics
Document Summary
Phillips drew a diagram that was to become famous. He plotted the rate of inflation against the rate of unemployment of the united kingdom for each year from 1861 to 1957. He found clear evidence of a negative relationship between inflation and unemployment: when unemployment was low, inflation was high and vice-versa. Two years later, paul samuelson and robert solow replicated phillips"s exercise for the u. s using data from 1900 to 1960. Apart from the period of the great depression of the 1930s, they too found a stable negative relationship between inflation and the unemployment rate. This relation, which samuelson and solow baptized the phillips curve rapidly became central to macroeconomic thinking and policy. It appeared according to phillips, samuelson and solow that countries could choose between different combinations of unemployment and inflation. In fact they argued that the phillips curve offered an infinite menu of choice to policy-makers and they could trade-off lower unemployment for higher inflation and vice-versa.