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2015 | OriginalPaper | Chapter

4. The Phillips Curve and Inflation Theory Reconsidered

Author : Masayuki Otaki

Published in: Keynesian Economics and Price Theory

Publisher: Springer Japan

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Abstract

This chapter extends the fundamental theory described in Chap. 2 by permitting that labor productivity varies in conjunction with the unemployment rate. It is assumed that a higher unemployment rate aggravates future labor productivity because unemployment curtails households’ income for educating their children. Stagnation in labor productivity triggers disinflation. This is because the unit cost of production becomes expensive relative to an arbitrarily given future price. Thus, there emerges a negative causality between the unemployment rate and the inflation rate even though ad-hoc assumptions concerning price stickiness are excluded.

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previous chapter The Existence of an Involuntary Unemployment Equilibrium
next chapter A Basic Model of a Flexible Exchange Rate System Under Perfect Capital Mobility
Footnotes
1
New Keynesians place much importance on exogenous stochastic shocks. This is because they need some substantiation for an economy to always be located out of long-run equilibrium. When such complicated and ornamental lag structures and stochastic shocks are eliminated, however, the basic structure of new Keynesian economics does not progress from the static menu-cost theory.
 
2
It must be noted that the real reservation wage in terms of current goods, \(\frac{w_{t}^{R}}{{{p}_{t}}}=\alpha \cdot \psi (1,{{\rho }_{t}})\), increases with the acceleration of the inflation rate, and hence there is a negative correlation between the nominal wage and the unemployment rate.
 
Literature
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Dewey J (1916) Democracy and education: an introduction to the philosophy of education. Free Press, New York
Friedman M (1968) The role of monetary policy. Am Econ Rev 58:1–17
Gali J (2008) Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework. Princeton University Press, Princeton
Mankiw NG, Reiss R (2002) Sticky information versus sticky prices: a proposal to replace the new Keynesian Phillips curve. Q J Econ 117:1295–1328CrossRef
Otaki M, Tamai Y (2012) A microeconomic foundation for the Phillips curve under complete markets without any exogenous price stickiness: a Keynesian view. Theor Econ Lett 2:482–486CrossRef
Phillips AW (1958) The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861–1957. Economica 25:283–299
Smith A (1776) An inquiry into the nature and causes of the wealth of nations. In: Eonnan E (ed) (1994) The modern liberty. W. Strahan and T. Cadell, New York
Metadata
Title
The Phillips Curve and Inflation Theory Reconsidered
Author
Masayuki Otaki
Copyright Year
2015
Publisher
Springer Japan
Book
Keynesian Economics and Price Theory

Print ISBN: 978-4-431-55344-1

Electronic ISBN: 978-4-431-55345-8

Copyright Year: 2015

DOI
https://doi.org/10.1007/978-4-431-55345-8_4