What Happened to the Phillips Curve?
You remember the Phillips Curve, the relationship between unemployment and inflation proposed by British economist A.W. Phillips late in the 1950s and developed into its present form in the late 1960s by Ned Phelps and Milton Friedman. For more than 25 years mainstream economists’ forecasts have rested on the idea that should unemployment fall below an unknown (but very real) level called the natural rate of unemployment, then inflation will start to rise. And inflation will keep on rising further until unemployment climbs back up to or above its “natural rate.” Today, however, the Phillips Curve is missing. All of a sudden economists are a lot less useful as forecasters. For as it stands now, economists’ forecasts of economic growth, unemployment and inflation are no longer projections based on historical patterns but instead pure guesses based on gut feelings about when, how, and if the Phillips Curve will return. If they are to be of any use for forecasting, they need to come up wit
