New Directions in Modern Economics series
Chapter 10: Inflation, Deflation and the Phillips Curve
1. THE SUPPLY EQUATION AND THE PHILLIPS CURVE In Part II, the role of the supply equation was discussed. At this stage of the analysis, some other aspects are worth considering. The first is that the role of the supply equation depends very much not only on the specification of the equation, but also on the values of the parameters. It follows that, as happened in the old neo-classical synthesis, in the new version also, much debate pays tribute to econometric studies. In this perspective, a semantic aspect should be addressed initially. In fact, what appears in the models as the equation: pt 5 ape 2 s1 (ut 2 u0) 1 (1 2 a) pt21 t (10.1) should be considered a particular specification of the supply curve. But on the contrary, the literature tends to define it as a Phillips curve. In our opinion, however, (see also Ferri and Variato, 2007), the Phillips curve is an econometric object that relates inflation and unemployment and that reflects the working of the whole model. In the course of the chapter, we have the opportunity to stress this difference. However, there is also a substantial reason why the supply curve must be reconsidered and this has to do with the different expectational hypotheses that can be put forward, as has been suggested in the previous chapter. They can have different impacts in influencing the working of the whole model. 2. DIFFERENT EXPECTATIONAL HYPOTHESES AND THE NAIRU The supply equation (10.1) has the form...
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