Monetary Union Stability: The Economics of the Phillips Curve: Formation of Inflation Expectations versus Incorporation of Inflation Expectations

Thomas Palley

No 4-2011, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: This paper examines the theory of the Phillips curve, focusing on the distinction between "formation" of inflation expectations and "incorporation" of inflation expectations. Phillips curve theory has largely focused on the former. Explaining the Phillips curve by reference to expectation formation keeps Phillips curve theory in the policy orbit of natural rate thinking where there is no welfare justification for higher inflation even if there is a permanent inflation - unemployment trade-off. Explaining the Phillips curve by reference to incorporation of inflation expectations breaks that orbit and provides a welfare economics rationale for Keynesian activist policies that reduce unemployment at the cost of higher inflation.

Keywords: Phillips curve; formation of inflation expectations; incorporation of inflation expectations; backward bending Phillips curve. (search for similar items in EconPapers)
JEL-codes: E00 E31 E52 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pke
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:imk:wpaper:4-2011

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