Is the Phillips Curve Relevant to Understanding the Connection between Inflation and Unemployment?
Although the Phillips curve plays an important role in macroeconomic models, empirical studies have often shown that the link between inflation and unemployment is actually weak or even non-existent. This article shows that the Phillips curve remains a relevant framework for analyzing inflation and understanding the inflation-unemployment relationship. The instability of the estimations results both from the difficulties of measuring labor market tensions and inflation expectations, and from the curve's non-linear character. In addition, changes in monetary policy strategy since the 1980s and the globalization of economies may affect the correlation between inflation and unemployment.
While it shows the relationship between business levels and price dynamics in many macroeconomic models, the growing disconnect between inflation and the unemployment rate, particularly since the Global Financial Crisis, seems to call into question the relevance of the Phillips curve. Despite the sharp recession of 2009, inflation has remained generally positive suggesting “missing disinflation” (Coibion and Gorodnichenko, 2015)1. Conversely, at the end of 2019, despite unemployment in the US plummeting to its lowest point since the late 1960s, inflation showed no significant movement, reflecting discussions on secular stagnation and the potential establishment of a regime where inflation consistently falls below the targets set by central banks (Eggertsson et al., 2019). In the euro area, despite a decline in the unemployment rate…