| Another explanation exists. If you look at the historical
graphs in the transparencies, you will see that the Phillips curve did
appear to have shifted around before 1968. Most notable is the behavior
of inflation and unemployment during the Great Depression. So one reason
that the static Phillips curve appeared to fit so well is that economists
and policymakers wanted it to fit. Recall that economists had a
ready interpretation for the static Phillips curve: when unemployment is
low wages get bid up and when it is high wages get bid down. Policymakers
also liked it: it suggested they could choose a balance between inflation
and unemployment according to their preferences. Put another way, economists
ignored evidence that the Phillips curve shifted around. They attributed
this shifting to the random noise associated with any economic relationship,
rather than worry that it might have reflected some fundamental misspecification
of the curve. |