Phillips Curve Calculator
Analyze the relationship between inflation and unemployment using Phillips Curve models
Phillips Curve Analysis
Traditional Phillips Curve (Original)
Formula: gW = gWT - f(U)
Long-term average wage growth rate
Percentage point change in unemployment rate
Phillips Curve Results
Model Used: TRADITIONAL Phillips Curve
Formula: gW = gWT - f(U)
Economic Interpretation: Wage growth at trend level
Policy Implications
Example: US Economic Analysis
New Classical Phillips Curve Example
Expected Inflation: 2.5%
Unemployment Rate: 4.2%
Natural Unemployment Rate: 5.0%
Phillips Coefficient: 0.5
Supply Shock: 0.3% (oil price increase)
Calculation
π = πᵉ - b(U - Un) + v
π = 2.5% - 0.5(4.2% - 5.0%) + 0.3%
π = 2.5% - 0.5(-0.8%) + 0.3%
π = 2.5% + 0.4% + 0.3%
π = 3.2%
Result: Inflation above expectations due to tight labor market and supply shock.
Phillips Curve Models
Traditional
Original wage-unemployment relationship
Focus: Money wage growth vs unemployment
New Classical
Expectations-augmented model
Focus: Inflation vs unemployment gap
New Keynesian
Microfounded with price stickiness
Focus: Forward-looking inflation dynamics
Key Concepts
Trade-off between inflation and unemployment
Short-run vs long-run relationships
Role of expectations in inflation dynamics
Price stickiness and wage rigidity
Supply shocks and external factors
Understanding the Phillips Curve
What is the Phillips Curve?
The Phillips Curve describes the inverse relationship between inflation and unemployment. Originally discovered by A.W. Phillips in 1958 studying British wage data, it has evolved into sophisticated models that form the backbone of modern macroeconomic policy.
Why is it Important?
- •Central to monetary policy decisions
- •Helps understand inflation-unemployment trade-offs
- •Guides economic forecasting and policy analysis
- •Essential for understanding business cycles
Model Evolution
1. Traditional (1958)
gW = gWT - f(U)
Original wage-unemployment relationship
2. New Classical (1970s)
π = πᵉ - b(U - Un) + v
Adds expectations and natural rate
3. New Keynesian (1990s)
πₜ = β·Eₜ{πₜ₊₁} + κ·ỹₜ
Microfounded with price stickiness