Phillips curves and unemployment dynamics: A critique and a holistic perspective

Marika Karanassou, Hector Sala, Dennis J. Snower

Research output: Contribution to journalArticleResearchpeer-review

20 Citations (Scopus)

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. © 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd.
Original languageEnglish
Pages (from-to)1-51
JournalJournal of Economic Surveys
Volume24
Issue number1
DOIs
Publication statusPublished - 1 Feb 2010

Keywords

  • Frictional growth
  • Impulse response function
  • Inflation dynamics
  • Inflation-unemployment trade-off
  • Natural rate of unemployment
  • New Phillips curve
  • Unemployment dynamics

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