Phillips Curve

Overview

The Phillips Curve was one of the first successful models of inflation. It hypothesized a relationship between employment (or unemployment) and the inflation rate. That is, as more people are employed, demand increases and wages are bid up as the supply of workers becomes depleted, this pushes up prices.

The Phillips Curve is constructed by running a standard OLS Regression of inflation against employment.

A Hypothetical Phillips Curve

The following dmonstrates a hypothetical Phillips type curve. Here, inflation is regressed against unemployment.

Challenges

The original Phillips curve was constructed over a limited time frame. Further studies later confirmed that the relationship does not hold as well over longer time frames, and required other models to explain. In general, the Phillips curve is useful in developing intuition about the causes of inflation, and can be used to explain and/or forecast short term relationships.