The Phillips Curve The Epitome Of Antiquity Essay

Michael Liotti and Brian Levine Professor Predescu MA 235-H01 Final Project The Phillips Curve: The Epitome of Antiquity Abstract In this paper, we will present a model discussed at length in Todorova (2012) representing the Phillips curve, the textbook macroeconomic relationship posting a negative relationship between unemployment and inflation. Specifically, the model posits that when unemployed workers are scarce, employers must compete with one another for the remaining, qualified workers by bidding wages upward, which translates into higher costs, which combined with stronger consumption by a more employed population, generates higher prices. To the contrary, when unemployment is high, perhaps a result of an adverse shock to the economy, demand for labor falls, as does consumption and investment spending, which reduces overall economic activity and tends to reduce prices. The Phillips curve recently has come under scrutiny in the literature and among Federal Reserve policymakers. Many current members of the Federal Open Market Committee (FOMC) cite the Phillips curve as their justification for continuing to raise interest rates, but there are valid questions as to whether this relationship fits the data. Using Todorova’s model, we find via computations and numerical simulations that the behavior of the inflation rate is in all cases oscillatory in nature – calling into question both the wisdom of the textbook Phillips curve proposed by Olivier Blanchard and the