Expectations Augmented Phillips Curve (Short And Long Run Phillips Curve)
Economics notes
Expectations Augmented Phillips Curve (Short And Long Run Phillips Curve)
➡️ The expectations augmented Phillips curve is an economic model that shows the relationship between inflation and unemployment.
➡️ It suggests that when unemployment is low, inflation increases, and when unemployment is high, inflation decreases.
➡️ The long-run Phillips curve is a vertical line at the natural rate of unemployment, meaning that inflation is not affected by changes in unemployment.
What is the expectations augmented Phillips curve and how does it differ from the traditional Phillips curve?
The expectations augmented Phillips curve is a modification of the traditional Phillips curve that takes into account the role of expectations in determining inflation. While the traditional Phillips curve suggests that there is a negative relationship between unemployment and inflation, the expectations augmented Phillips curve recognizes that workers and firms may adjust their expectations of future inflation based on past experience. This means that the short-run Phillips curve may shift over time as expectations change, and that the long-run Phillips curve may be flatter than the short-run curve if workers and firms have adaptive expectations.
How does the expectations augmented Phillips curve help explain stagflation?
Stagflation is a situation where the economy experiences both high inflation and high unemployment, which is difficult to explain using the traditional Phillips curve. However, the expectations augmented Phillips curve suggests that stagflation can occur if workers and firms have rational expectations of future inflation that are not consistent with the central bank's inflation target. In this case, the central bank may need to raise interest rates to bring inflation back under control, but this can also lead to higher unemployment in the short run.
What are the policy implications of the expectations augmented Phillips curve?
The expectations augmented Phillips curve suggests that monetary policy can be effective in controlling inflation in the short run, but that it may have limited impact on unemployment if workers and firms have adaptive expectations. This means that central banks may need to use unconventional policy tools, such as forward guidance or quantitative easing, to influence expectations and shift the short-run Phillips curve. Additionally, the expectations augmented Phillips curve highlights the importance of communication and transparency in central bank policy, as expectations play a key role in shaping economic outcomes.