Revision - Inflation and unemployment

What is the original Philips curve and its significance?

It describes an inverse relationship between wage inflation and unemployment, suggesting a trade-off for policymakers.

What happens in a tight labor market according to the Philips curve?

When unemployment is low, workers have more bargaining power, leading to higher wages and consequently higher inflation.

What characterized the expectations-augmented Philips curve in the 1970s?

It showed that the simple trade-off between inflation and unemployment broke down, leading to stagflation.

What is the key idea of the expectations-augmented Philips curve?

People adjust their behavior based on their expectations of inflation, leading to a long-run Phillips curve that is vertical at the natural rate of unemployment.

What is inflation targeting?

A policy framework where the central bank announces a numerical inflation goal and uses monetary policies to maintain inflation near that target.

What changes occurred as part of the inflation targeting strategy?

Central banks anchored inflation expectations, flattening the Phillips curve and increasing trust in low inflation.

What factors contributed to the return of inflation post-2020?

Covid-19 shocks, the war in Ukraine, monetary and fiscal expansion, and rising inflation expectations.

How did central banks respond to rising inflation in 2022-2023?

They raised interest rates aggressively to cool inflation, but this also posed risks to rising unemployment.

What does the current context suggest about the short-run trade-off between inflation and unemployment?

While the long-run Phillips Curve is vertical, short-run decisions present difficult choices between inflation and unemployment again.