Aggregate Supply
Phillips Curve, Taylor Curve
- N. Gregory Mankiw, "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," NBER Working Paper #7884, September 2000.
The article by Mankiw (2000) is the main piece to read this week. Additional discussion of the Phillips Curve — and the so-called "Taylor Curve" — occurs in the first two chapters of "Inflation, Unemployment, and Monetary Policy," as well as in Chatterjee (2002).
- Robert M. Solow and John B. Taylor, "Inflation, Unemployment, and Monetary Policy," MIT Press, 1998.
- Satyajit Chatterjee, "The Taylor Curve and the Unemployment-Inflation Tradeoff," Federal Reserve Bank of Philadelphia Business Review, 3rd Quarter 2002.
For the adventurous, King (2000) has a deviation of the "New Keynesian Phillips Curve" that is referenced by Mankiw (2000), along with some commentary of his own. Don't worry too much about the math details right now; we will review this approach in a few weeks. (Optional reading.)
- King, Robert. "The New IS-LM Model: Language, Logic, and Limits," Federal Reserve Bank of Richmond Economic Quarterly, v. 86, n. 3, Summer 2000.
Textbook Background
In order to understand Mankiw (2000), you may find it useful to review models of aggregate supply in one of the Econ 302 textbooks. As you might infer from the list below, Blanchard goes into much more detail, including a very specific derivation of the Phillips Curve from a stylized model of the labor market (which he develops in ch. 6).
- Blanchard: Ch. 7, 8, 9.
- Mankiw: Ch. 13.
Application: Natural Rate Debate
What is the natural rate of unemployment (or the NAIRU, or the level or growth rate of potential GDP) is an essential question that arises in attempts to incorporate the Phillips Curve into policy-making decisions. The prior theorical question is whether this concept is at all useful for thinking about monetary policy. An extensive debate on this issue appears in a symposium on The Natural Rate of Unemployment in the Winter 1997 Journal of Economic Perspectives. Judd (1997) and Walsh (1998) provide summaries of some the views in this debate. For a alternative (somewhat dissenting view) within the policy-making context, see Trehan (1999). (Optional readings.)
- "Symposium: The Natural Rate of Unemployment," Journal of Economic Perspectives, v. 11, n. 1, Winter 1997.
- John Judd, "NAIRU: Is It Useful for Monetary Policy?" Federal Reserve Bank of San Francisco Economic Letter 97-35, November 21, 1997.
- Carl Walsh, "The Natural Rate, NAIRU, and Monetary Policy," Federal Reserve Bank of San Francisco Economic Letter 98-28, September 18, 1998.
- Bharat Trehan, "Supply Shocks and the Conduct of Monetary Policy," Federal Reserve Bank of San Francisco Economic Letter 99-21, July 2, 1999.
Finally, Milton Friedman's (1968) presidential address to the American Economic Association, in which he resolutely critiques the existing conception of the Phillips Curve and introduces his conception of the natural rate, is a classic piece of economic intellectual history that deserves to be read even today. (Optional reading.)
- Milton Friedman, "The Role of Monetary Policy," The American Economic Review, v. 58, n. 1, March 1968.