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Working Paper

An Anatomy of the Phillips Curve

Authors

  • Karanassou
  • M.
  • Snower
  • D.J.

Publication Date

JEL Classification

E2 E3 E5 J3

Key Words

Forward- and Backward-Looking Wage-price Behavior

Inflation-unemployment Tradeoff

monetary policy

Traditional and New Phillips Curve

Wage-price staggering

The paper examines how the long-run inflation-unemployment tradeoff depends on the degree to which wage-price decisions are backward- versus forward-looking. When economic agents, facing time-contingent, staggered nominal contracts, have a positive rate of time preference, the current wage and price levels depend more heavily on past variables (e.g. past wages and prices) than on future variables. Consequently, the long-run Phillips curve becomes downward-sloping and, indeed, quit flat for plausible parameter values. This paper provides an intuitive account of how this long-run Phillips curve arises.

Kiel Institute Expert

  • Prof. Dennis J. Snower, Ph.D.
    President Emeritus

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