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PHILLIPS CURVES AND UNEMPLOYMENT DYNAMICS: A CRITIQUE AND A HOLISTIC PERSPECTIVE
Author(s) -
Karanassou Marika,
Sala Hector,
Snower Dennis J.
Publication year - 2010
Publication title -
journal of economic surveys
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.657
H-Index - 92
eISSN - 1467-6419
pISSN - 0950-0804
DOI - 10.1111/j.1467-6419.2009.00598.x
Subject(s) - economics , phillips curve , unemployment , inflation (cosmology) , context (archaeology) , keynesian economics , macroeconomics , natural rate of unemployment , misery index , perspective (graphical) , econometrics , full employment , unemployment rate , artificial intelligence , computer science , paleontology , physics , biology , theoretical physics
Abstract The conventional wisdom that inflation and unemployment are unrelated in the long run implies the compartmentalization of macroeconomics. While one branch of the literature models inflation dynamics and estimates the unemployment rate compatible with inflation stability, another one determines the real economic factors that drive the natural rate of unemployment. In the context of the new Phillips curve, we show that frictional growth, i.e. the interplay between lags and growth, generates an inflation–unemployment trade‐off in the long run. We thus argue that a holistic framework, such as the chain reaction theory (CRT), should be used to jointly explain the evolution of inflation and unemployment. A further attraction of the CRT approach is that it provides a synthesis of the traditional structural macroeconometric models and the (structural) vector autoregressions.