Part 1 - Question 2.b - Phillips Curve · Introducció a la Macroeconomia UPF 2018

Contrast the empirical relationship documented in the 1950s–1960s with the breakdown observed during the 1970s and 1980s. Detail why the original trade-off vanished and how expectations changed.

Solución: In the 1950s–1960s, low and unpersistent inflation meant $\pi_t^e \approx 0$ (anchored), leading to a stable inverse relationship between unemployment and the level of inflation ($\pi_t = (\mu + z) - \alpha u_t$). In the 1970s, supply shocks and persistent high inflation caused expectations to become backward-looking ($\pi_t^e = \pi_{t-1}$), shifting the relation to an accelerationist Phillips curve linking unemployment to the change in inflation: $\pi_t - \pi_{t-1} = -\alpha(u_t - u_n)$.