Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/105946
Authors: 
Palley, Thomas I.
Year of Publication: 
2011
Series/Report no.: 
IMK Working Paper 4/2011
Abstract: 
This paper examines the theory of the Phillips curve, focusing on the distinction between "formation" of inflation expectations and "incorporation" of inflation expectations. Phillips curve theory has largely focused on the former. Explaining the Phillips curve by reference to expectation formation keeps Phillips curve theory in the policy orbit of natural rate thinking where there is no welfare justification for higher inflation even if there is a permanent inflation - unemployment trade-off. Explaining the Phillips curve by reference to incorporation of inflation expectations breaks that orbit and provides a welfare economics rationale for Keynesian activist policies that reduce unemployment at the cost of higher inflation.
Subjects: 
Phillips curve
formation of inflation expectations
incorporation of inflation expectations
backward bending Phillips curve.
JEL: 
E00
E31
E52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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