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IZA
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An Anatomy of the Phillips Curve
by
Dennis J. Snower, Marika Karanassou
(November 2002)
Abstract:
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, quit flat for plausible parameter values. This
paper provides an intuitive account of how this long-run Phillips curve arises.
Text: See Discussion Paper No. 635 
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