Microeconomic Foundation of the Phillips Curve

Yasuhito Tanaka

Studia Universitatis Babeș-Bolyai Oeconomica, 2020, vol. 65, issue 3, 14-26

Abstract: It is an important problem to derive negative relation between the unemployment rate and the inflation rate, that is, the Phillips curve without market imperfection. We derive the Phillips curve using an overlapping generations model under monopolistic competition. We consider the effects of exogenous changes in labor productivity. An increase (decrease) in the labor productivity in a period induces a decrease (increase) in the employment, an increase (decrease) in the unemployment rate and a falling (rising) in the price of the goods in the same period. Then, given the price in the previous period the inflation rate falls (rises). This conclusion is based on the premise of utility maximization of consumers and profit maximization of firms. Therefore, we have presented a microeconomic foundation of the Phillips curve.

Keywords: Phillips Curve; Microeconomic foundation; Overlapping generations model; Monopolistic competition (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Microeconomic foundation of the Phillips curve (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:subboe:v:65:y:2020:i:3:p:14-26:n:2

DOI: 10.2478/subboec-2020-0012

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