Narrow Results

There is a widely believed but entirely mythical story to the effect that the discovery of ‘the Phillips curve’ was, in the 1960s and 1970s, an inspiration of inflationist policy. One aspect of the explanation of how that myth came to be widely believed is considered in this paper. It is noted that the expression ‘Phillips curve’ was applied in a number of quite distinct and inconsistent ways, and as a result there was, by about 1980, an enormous confusion as to what that label meant. This confusion, as well as the multiplicity of possible meanings, it is suggested, provides part, although only part, of the explanation of the myth’s acceptance.

In this paper, we use the Vector Autoregression (VAR) approach to examine the robustness of the Phillips Curve in the United States economy from January 2020 to June 2022. The data is characterized by VAR(4) with a cointegrating rank of 2, using the unemployment rate and sticky inflation. The Impulse Response Function (IRF) is used to examine the relationship between the unemployment rate and inflation. The Granger-causal Test results suggest that historical unemployment data is useful for improving inflation projections. With a longer prediction horizon, unemployment shocks have a greater impact on the forecast error variance of inflation. Based on the impulse response function, the Phillips Curve is not alive in the US economy during the COVID-19 pandemic, but it can still be a significant factor legitimate for the government to set economic policy.