The economics of the Phillips curve: Formation of inflation expectations versus incorporation of inflation expectations

Thomas Palley

Structural Change and Economic Dynamics, 2012, vol. 23, issue 3, 221-230

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; Inflation expectation formation; 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)
Date: 2012
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:23:y:2012:i:3:p:221-230

DOI: 10.1016/j.strueco.2012.02.003

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