Introduction to the New Keynesian Phillips Curve

I n most industrialized economies inflation tends to be pro-cyclical; that is, inflation is high during times of high economic activity. When economic activity is measured by the unemployment rate this statistical relationship is known as the Phillips curve. The Phillips curve is sometimes viewed as a menu for monetary policymakers, that is, they can choose between high inflation and low unemployment or low inflation and high unemployment. But this interpretation of the Phillips curve assumes that the relationship between unemployment and inflation is structural and will not break down once a policymaker attempts to exploit the perceived tradeoff. After the high inflation episodes experienced by many economies in the 1970s, this structural interpretation of the Phillips curve was discredited. Yet, after a period of low inflation in the 1980s and early 1990s, economists have again worked on a structural interpretation of the Phillips curve. This New Keynesian Phillips curve (NKPC) assumes the presence of nominal price rigidities. In this special issue of the Economic Quarterly, we publish four surveys on the history of the Phillips curve, the structural estimation of the New Keynesian Phillips curve, and the policy implications of the nominal rigidities underlying the New Keynesian Phillips curve.