TITLE

Near-Rational Wage and Price Setting and the Long-Run Phillips Curve

AUTHOR(S)
Akerlof, George A.; Dickens, William T.; Perry, George L.
PUB. DATE
January 2000
SOURCE
Brookings Papers on Economic Activity;2000, Issue 1, p1
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
The article focuses on near-rational wage and price setting and the long-run Phillips curve. In his presidential address to the American Economic Association, Milton Friedman asserted that in the long run the Phillips curve was vertical at a natural rate of unemployment that could be identified by the behavior of inflation. Unemployment below the natural rate would generate accelerating inflation, and unemployment above it, accelerating deflation. The New Classical economists posed a further challenge to the stabilization orthodoxy of the day. In their models with rational expectations, not only was monetary policy unable to alter the long-term level of unemployment, it could not even contribute to stabilization around the natural rate. The New Keynesian economics has shown that, even with rational expectations, small amounts of wage and price stickiness permit a stabilizing monetary policy. But the idea of a natural unemployment rate that is invariant to inflation still characterizes macroeconomic modeling and informs policymaking. The familiar empirical counterpart to the theoretical natural rate is the nonaccelerating-inflation rate of unemployment.
ACCESSION #
3600248

 

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