Question

Define Phillips curve and explain the 1960's view of Phillips curve. What is the Modern view of Phillips curve and how does it differ from views of the past?

Answer 1

Sir, Arthur phillips in 1954 gave the relation for the phillips curve which meant that there is a tradeoff between unemployment and infaltion. So, if we want to have a low infaltion rate, we will have to bear a higher unemployement rate. This was the 60's view of phillips curve.

The same relation was estimated by Samuelson in 1960's for US data, they used price as proxy for wage. They found somewhat same realtion.

But, around 1970's the realtionhsip broke down. Friedman and phelps in thier work said that there is no long run trade off between infaltion and unemployment.

With the Rational expectations in picture, there was a whitewash of the old theories and we arrived at NAIRU which aruges for a trade off but with expectation about future infaltion in picture and also gives the way for antural rate of unemployment.