NCPA - National Center for Policy Analysis

Phillips Curve Out Of Date

June 20, 2000

For nearly half a century, economists and politicians have sworn by the Phillips curve. The idea behind the curve is an equation that says if unemployment goes down, inflation goes up. Now, however, Harvey Rosenblum, head of research for the Dallas Federal Reserve Bank, has examined the record of the 1990s, and found rapid growth and inflation aren't synonymous.

Writing in the May/June issue of the Dallas Fed's publication Southwest Economy, Rosenblum says that in the 1960s through 1980s, the Phillips curve was a reasonable idea -- inflation rose as unemployment fell. But from 1993 to 1999, the curve reversed, and unemployment and inflation fall together.

Rosenblum suggests several reasons why.

  • Immigration, expanded trade and globalization -- notably NAFTA -- leading to increased output but lower inflation.
  • An "explosion of private-sector application of new technologies."
  • A reduced scope for government.
  • Abundant capital for business.

Discarding the Phillips curve also means higher interest rates may not be the cure for signs of overheating in the economy, observers say.

Source: Scott Burns, "Economic Laws Aren't Immutable," Dallas Morning News, June 18, 2000.


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