Employment vs. Inflation in the Long Run

The Phillips Curve is a short run relationship. In the long run, the Phillips Curve can shift its position and change its curvature. Thus, the rate of inflation in the long run depends not only on where on the Phillips Curve the economy is operating, but also where the Phillips Curve is positioned. The fact that the Phillips Curve can shift over time causes some difficulty in interpreting historical data, because it is hard to know whether any given change reflects a shift in or a movement along the Phillips Curve. A moving Phillips Curve can result in a situation where unemployment and inflation move in the same direction. This has caused some to conclude that there is no Phillips Curve. It is important to remember that the Phillips Curve is a short run relationship.

However, short-run decisions should not be made in the absence of consideration of their long-run impacts. It might be possible, in normal situations, that high unemployment and low inflation today might permit preferred combinations of unemployment and inflation that would not have been possible otherwise. In such situations, the appropriate sort-term policy goal might be to choose an aggregate demand target below potential output.