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The short-term Phillips curve looked like a normal Phillips curve but shifted in the long run as expectations changed. In the long run, only a single rate of unemployment (the NAIRU or "natural" rate) was consistent with a stable inflation rate.
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.
The Phillips curve appeared to reflect a clear, inverse relationship between inflation and output. The curve broke down in the 1970s as economies suffered simultaneous economic stagnation and inflation known as stagflation. The empirical implosion of the Phillips curve followed attacks mounted on theoretical grounds by Friedman and Edmund ...
Shortly after the publication of Lucas's article, Kydland and Prescott published the article "Rules rather than Discretion: The Inconsistency of Optimal Plans", where they not only described general structures where short-term benefits are negated in the future through changes in expectations, but also how time consistency might overcome such ...
Well-known specific theoretical models include short-term models like the Keynesian cross, the IS–LM model and the Mundell–Fleming model, medium-term models like the AD–AS model, building upon a Phillips curve, and long-term growth models like the Solow–Swan model, the Ramsey–Cass–Koopmans model and Peter Diamond's overlapping ...
The rationale behind Lucas's supply theory centers on how suppliers get information. Lucas claimed that suppliers had to respond to a "signal extraction" problem when making decisions based on prices; the firms had to determine what portion of price changes in their respective industries reflected a general change in nominal prices (inflation) and what portion reflected a change in real prices ...
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[3] [4] [5] In some textbooks, the dynamic AD–AS version is referred to as the "three-equation New Keynesian model", [6] the three equations being an IS relation, often augmented with a term that allows for expectations influencing demand, a monetary policy (interest) rule and a short-run Phillips curve. [7]