The New Keynesian Philips Curve: Expectations and Inflation Policy - The New Keynesian Philips curve
3 important questions on The New Keynesian Philips Curve: Expectations and Inflation Policy - The New Keynesian Philips curve
The new Keynesian Philips curve was developed because:
Theories based on the Philips curve were inconsistent with stagflation, so a group of economists stated that unemployment does not depend on the rate of inflation but on unanticipated inflation of the discrepancy between the expected and actualized rates of inflation.
Movements along the Philips curve, or the inflation-unemployment trade-off, are the result of unanticipated changes in inflation, while shifts in the SRPC reflect changes in expected inflation, because:
When workers and employers sit at the negotiation table, both sides will take inflation expectations into account. As long as the inflation is correctly forecast, the rate of unemployment will remain constant at the natural rate u*, irrespectively of whether actual inflation is low or high. However, they may be times when inflation is not correctly anticipated and there may be discrepancy between the actual rate of inflation and the rate people expected when negotiating wages.
In the long-run, inflation will depend on the behavior of the money supply. The quantity equation states that:
Money times velocity equals nominal GDP: M x V = P x Y
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