The Phillips Curve and U.S. Macroeconomic Policy: Snapshots, 1958-1996

T he curve first drawn by A.W. Phillips in 1958, highlighting a negative relationship between wage inflation and unemployment, figured prominently in the theory and practice of macroeconomic policy during 1958–1996. Within a decade of Phillips’ analysis, the idea of a relatively stable longrun tradeoff between price inflation and unemployment was firmly built into policy analysis in the United States and other countries. Such a long-run tradeoff was at the core of most prominent macroeconometric models as of 1969. Over the ensuing decade, the United States and other countries experienced stagflation, a simultaneous rise of unemployment and inflation, which threw the consensus about the long-run Phillips curve into disarray. By the end of the 1970s, inflation was historically high—near 10 percent—and poised to rise further. Economists and policymakers stressed the role of shifting expectations of inflation and differed widely on the costliness of reducing inflation, in part based on alternative views of the manner in which expectations were formed. In the early 1980s, the Federal Reserve System undertook an unwinding of inflation, producing a multiyear interval in which inflation fell substantially and permanently while unemployment rose substantially but temporarily. Although costly, the disinflation process involved lower unemployment losses than predicted by consensus macroeconomists, as rational expectations analysts had suggested that it would.