December 1, 2002
The paper examines how the long-run inflation-unemployment tradeoff depends on the degree to which wage-price decisions are backward- versus forward-looking. When economic agents, facing time-contingent, staggered nominal contracts, have a positive rate of time preference, the current wage and price levels depend more heavily on past variables (e.g. past wages and prices) than on future variables. Consequently, the long-run Phillips curve becomes downward-sloping and, indeed, quite flat for plausible parameter values. This paper provides an intuitive account of how this long-run Phillips curve arises.
J.E.L classification codes: E2, E3, E5, J3
Keywords:Inflation-unemployment tradeoff, Wage-price staggering, Monetary policy, Forward- and backward-looking wage-price behavior, Traditional and New Phillips curve