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Moving along the Phillips curve, this would lead to a higher inflation rate, the cost of enjoying lower unemployment rates. [ citation needed ] Economist James Forder disputes this history and argues that it is a 'Phillips curve myth' invented in the 1970s.
This exhibits a Phillips curve relationship, as inflation is positively related with output (i.e. inflation is negatively related with unemployment). However, and this is the point, the existence of a short-run Phillips curve does not make the central bank capable of exploiting this relationship in a systematic way.
Several studies around the Phillips curve tried to understand whether it is possible or not for policy makers to exploit the Phillips curve, that is to accept a lower level of employment, and so an higher level of unemployment, in exchange of inflation stabilisation. Nowadays there is a still of debate around this concept.
Milton Friedman argued that a natural rate of inflation followed from the Phillips curve.This showed wages tend to rise when unemployment is low. Friedman argued that inflation was the same as wage rises, and built his argument upon a widely believed idea, that a stable negative relation between inflation and unemployment existed. [11]
One important application of the critique (independent of proposed microfoundations) is its implication that the historical negative correlation between inflation and unemployment, known as the Phillips curve, could break down if the monetary authorities attempted to exploit it.
Instead of the Phillips curve they used models based on the natural rate of unemployment where expansionary monetary policy can only temporarily shift unemployment below the natural rate. Eventually, firms will adjust their prices and wages for inflation based on real factors, ignoring nominal changes from monetary policy.
Lucas' intention was to prove that the Phillips curve exists without existing. It has been a heritage that there is a trade-off between inflation and unemployment or real economic performance, so it is undoubted that there is a short run Phillips curve (or there are short run Phillips curves).
2. Early Views on Unemployment and the Phillips Curve 3. The Phillips Curve and Shifting Views on Unemployment 4. The Troublesome NAIRU: The Hoax that Undermined Full Employment Part II Full Employment Abandoned. Shifting Sands and Policy Failures 5. The Shift to Full Employability 6. Inflation First: The New Mantra of Macroeconomics 7.