American Economic Association

Price Expectations and the Phillips Curve

Author(s): Robert E. Lucas, Jr. and Leonard A. Rapping
Source: The American Economic Review, Vol. 59, No. 3 (Jun., 1969), pp. 342-350
Published by: American Economic Association
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 Price Expectations and
Phillips Curve
By ROBERT E. LUCAS, JR. AND LEONARD A. RAPPING*
Until recently, there have been two main
approaches to the rationalization of the
observed negative correlationbetween the
unemployment rate and the rate of infla-
tion (the Phillips curve)'. Phillips [19] and
Lipsey [8] postulated a competitive adjust-
ment mechanism,where the rate of change
in money wages is negatively related to
excess supply in the labor market, with the
latter quantity measuredby the unemploy-
ment rate. A second view, expressed by
Eckstein and WVilson[3] and Perry [17]
emphasizes a collective bargaining mecha-
nism with unemployment rates and other
variables(like profitrates) measuringunion
bargainingpower over (or employer resis-
tance to) increasesin money wages.2Both
* The authors are associate professors at Carnegie-
Mellon University. They wish to thank T. W. McGuire
and E. Phelps who commented on an earlier draft of
this paper.
' Throughout this paper the term Phillips curve is
used interchangeably to refer either to a price change-
unemployment relationship or to a money wage change-
unemployment relationship.
2 These remarks are not intended to suggest that the
references cited contain a well articulated theory of
wage-employment determination in an economy domi-
nated by collective bargaining. We have been unable to
find such a theory anywhere in the literature. We have,
however, attempted to construct a rationalization of
the Phillips curve along these lines ourselves-an at-
tempt which ran into two difficulties we found insur-
mountable. First, why should "money illusion" char-
acterize the outcome of collective bargaining if the
individuals and employers involved are free of it? Sec-
ond, even if one had an adequate theory of wage deter-
mination in a single, unionized sector, what implica-
tions will this theory have for aggregate wage and em-
ployment determination? (This later point is developed
more fully in [91.) In part, the union impact on aggre-
gate wages depends on the wage interconnections be-
tween the unionized sector and the rest of the economy.
In several recent studies, McGuire and Rapping, [11],
[12], [13], [14] argue that most of the evidence on
"spillovers" from uinionized to nonunionized sectors is
342
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the
approaches,as implemenitedempiricallyby
these and other authors,imply a permanent
and rather discouraging tradeoff between
inflation and unemployment. The results
have led to two important policy conclu-
sions: first, that sustained inflation is both
necessary and sufficient to the sustained
maintenance of low unemployment rates;
and, second, that policies (like wage-price
guideposts) which may shift the Phillips
curve, are an important ingredient of na-
tional economicpolicy.
Recently, several authors have sought to
elaborate different theories underlying the
Phillips curve, emphasizingthe role of ex-
pectations in labor markets either in addi-
tion to, or in place of, the bargainingmecha-
nisms referredto above.3These approaches,
while differing considerably in detail, all
suggest that the inflation-unemployment
trade-offis a short run phenomenon,or that
sustained inflation will make no contribu-
tion to the permanent lowering of unem-
ployment rates. In view of the policy impli-
cations drawnfrom the originalapproaches,
as sketched above, it is clearly crucial to
attempt to discriminateempiricallybetween
what may be called the "bargainingmech-
anism approach" and the "expectations
approach"to a theory of the Phillips curve.
The objective of this paper is to review a
particularversion of the "expectations ap-
proach" (our own), to test this version on
either ambiguous or irrelevant to absol-utewage determi-
nation. For an application of a bargaining based
Phillips curve to the entire economy (as opposed to the
manufacturing sector studied in [31,and [18]) see Tella
and Tinsley [21].
3 We have in mind our own previous study, [91, as
well as Phelps [181, Friedman [4], Meltzer [10], and
Mortenson [15].
 LUCAS AND RAPPING: THE PHILLIPS CURVE 343

United States time series for 1904-65, and wtY wt*

to use this theory as a frameworkfor isolat- WtA S
ing short and long run unemployment-
inflation trade-offs.Theory, tests, and con-
clusions are given in sections I, II, and III
respectively.
-Short-run
~{w*hed fixed}
I. An ExpectationsTheoryof
the Phillips Curve wt/Mt
In an earlierstudy4we postulated an ag- FIGURE 1
gregate labor supply function of the form:
In (Nt/Mt) the 'interpretationof all or part of measured
unemployment as an excess supply in the
(1) = iB0+ 31 Iin(Wt/Wt*) + 12 In (wg*) usual sense is precluded. We sought, then,
- 13 in (Pt*/P9), an alternativehypothesis as to what people
mean when they answer"yes"to the Census
whereNt is total man-hourssupplied,Ms is
Bureauquestion: "Areyou actively seeking
population, wt is the current real wage
work?" We hypothesized that respondents
(Wi/Pt), and wt and P* are "permanent" to this question take it to mean: "Are you
or "normal"real wages and prices respec-
seeking work at your normal wage rate?"
tively. In [91,eq. (1) is generatedby a two-
Thus we assumed that the labor force as
periodFisheriananalysis of the household's
measured by the employment survey con-
labor-leisurechoice problem,which implies
sists of employed persons plus those who
that 9, and /3 are positive, while /2 may
are searchingfor work at what they regard
have either sign. Estimates reported in [91
as their normal wage rate (or, roughly
indicate that 12 is approximatelyzero, or
equivalently, in their normal occupation).
that the long run labor supply schedule is
To define unemployment (in our sense)
approximatelyvertical. On the other hand,
more precisely, we define the normal labor
it was found that labor supply is highly
supply, N*, to be the quantity which would
responsive to changes in Wt/Wt*, the ratio
be supplied when the actual wage rate, wt,
of currentto normal wages, and to the an-
equals the anticipated normal wage, w*l,
ticipatedinflationrate, In(Pt*/Pt). Thus the
and when actual prices, Pt, equal normal
short and long run behaviorof labor supply,
prices, P* . Under these conditions, (1)
as predictedby our theory and confirmedin
becomes:
our tests, is as inidicatedin Figure 1.1
Combiningthis supplymodelwith a labor (2) In ( */Mt) -A n + /3 lit til

demand function, and assuming that labor

markets are cleared each period, one has a + (82 - 31) ItnWt- l3 (P*t/P_)
complete aggregate labor market model Subtracting(1) from (2) gives:
(once the formation of w* and P* is de-
in = 3
scribed). Completingthe model in this way, (3) (vt/lNt) In} (7ot-1/wt)

'
4Since considerable space is devoted to explaining ()+ 3 (P .1/Pt).
equation (1) in our earlier paper [9], treatment here will
be sketchy. Because In (N*lNt)-(N*-N,)IN*, the
5 An anticipated rise in the price of future goods in- left side of (3) has the dimensionsof an un-
duces, among other effects, a substitution of current employment rate, but it will differfrom the
leisure for future goods consumption-hence a decrease
in current labor supply (other prices, including the measured unemploymenitrate, Ut, for two
nominal interest rate, remaining fixed). reasons. First, teenagers and women may

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344 THE AMERICAN ECONOMIC REVIEW
fail to report themselves as unemployed
and, secondly, N* is defined in terms of a
representative household and so does not
allow for the frictional component of mea-
sured unemployment. Since there is reason
to think that the frictional and nonfric-
tional components of total unemployment
vary together, we assume that Ut and
In (N*/Nt) are linearly related:
(4) Ut = go + g lin (N*t/Nt),
Combinilng (3) and (4):
Ut = go + git3l in (wt-l/wt)
+ g913 III (P1/f-Pt).
It remains only to link the unobserved,
normal wages and prices to observable,
actual values. In our original model we
assumed that both normal variables are
adaptively calculated by households from
actual values, with the same reaction
parameterX, O<X < 1, or that:
(6) In (w*X) In
i (zet) + (1-
and:
(7) In (P*) X In (Pt) + (1-
Using standard methods to reduce the
system of difference equations (5)-(7) to a
single difference equation in Ut, we obtain :6
t= Xgo - g3l In (wt/wt-i)
(8) - gp33 In (Pt/Pt_1)
+ (1-X) L.
The reader should note that when going
from (5) to (8) the coefficients of the wage
and price terms change sign because in (6)
and (7) we assume an "elasticity of expec-
tations" less than unity (when current
prices or real wages rise, suppliers anticipate
an eventual return to normalcy). Since (8)
relates unemployment to the inflation rate
(ceteris paribus) it is a Phillips curve in the
broad sense.7 In the next section, estimates
6 See note 10.
I Since knowledge of the rates of chanige of any two
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of (8) for 1904-65, and various subperiods,
are reported.
As with the other empirical Phillips
curves, (8) implies a long run as well as a
short run inflation-unemployment trade-off,
with the consequent promise of a permanent
decrease in unemployment if the economy
is willing to tolerate a sustained inflation.
This long run trade-off is, however, built
inmo(8) in a transparent way by the expec-
gO, gi > 0.
tations hypotheses (6) and (7). Thus the
reason (8) offers a long run trade-off lies in
the assumption of an unreasonable stub-
borness on the part of households: if a sus-
tained inflation policy is pursued by the
government, households following (7) will
continue forever to underpredict future
prices.
There is no entirely satisfactory way to
remedy this deficiency in the theory within
the framework of adaptive expectations.
Any forecaster predicting future prices as a
fixed function, however complicated, of
X) In (w* 1), past prices can be systematically fooled by
a clever opponent manipulating the actual
series at will. But since there is little reason
X) In (P* ) to believe that the government systemati-
cally manipulates prices, it may be worth-
while to examine adaptive schemes which,
unlike (6) and (7), permit a short run
Phillips curve without deciding the ques-
tion of the existence of a long run curve a
priori.
Focusing on the anticipation of prices
rather than real wages, a natural generaliza-
tion of (7) is the hypothesis that ln(Pt*) is a
"rational distributed lag function" of past
actual values,8 or that:
of the three variables wi, Pg and wtPg (money wages)
implies knowledge of the rate of change of the third,
(8) can be rewritten in two other ways. In particular,
one may relate unemployment to money wage changes,
as is more conventionally done.
8 The term "rational distributed lag function" is
from Jorgenson [6], where the word "rational" applies
to the form of the generating function of the distri-
buted lag. Jorgenson shows that a distributed lag has a
rational generating function if and only if it can be ex-
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 LUCAS AND RAPPING: THE PHILLIPS CURVE
In (fPt*) = boIn (Pt) + b, In (Pt-1)
+ + br In (Ptr)
+ a, In (Pe*l) +
- a, In (P*L).
As in (7), we impose the condition:
(10) bo + + b + a1 + * + a,
so that a proportional change in all past
prices would imply a change in Pt* of the
same proportion.9 \We assume as well that
(9) is stable.
Equations (5), (6) and (9) form a system
of three linear difference equations in Ut,
ln(P*) and ln(w*) with forcing variables
in(Pt) and ln(wt), which may, using the
restriction (10), be reduced to a difference
equation in Ut of the form :10
lt = a + co0 In (Pt) +
+ CkA Itn (Pt-k) -+ (oA Iin(Wt)
(11) + +
+d,S in (wt1n)
+ e1t7t_1 + * * - + emUt-m,
where Axt=xt-x_j1. The coefficient
the current inflation rate in (11) is equal to
gfl1(bo- 1) so that the existence of a down-
pressed in the form (9), which he calls its "final form".
This usage should not be confused with "rational ex-
pectations" as defined by Muth in f16]; the two con-
cepts are unrelated.
T
The formulation (9) is sufficiently general to include
the best known expectations hypotheses. For example,
to obtain (7), let bo =X and a, = 1-X.For expectations of
inflation which are adaptive on the rates of change of
prices (and hence extrapolative on price levels) set
bo= 1+X) bi = -1, and a, = IA, and other ai, bj equal to
zero. (This example also shows that one would not
wish to impose the restriction bi>O on (9)). Any con-
vex combination of regressive (as in (7)) and extrapola-
tive expectations can then be formed in an obvious way.
10This reduction is most easily carried out by re-
writing (5), (6) and (9) in terms of current (time t)
values of the variables, using the lag operator E de-
fined by Ex,=xt-1. Then to obtain (11), one multiplies
both sides of (5) by [1-a,E-. . .-a8E-] [l-(1-X)E] and
substitutes from (6) and (9) to eliminate terms involving
wt* and P9*. Then applying (10) to the resulting expres-
sion yields (11). The parameters k, n and m of (11) are
found to be k=-nax(r,s)-1, n=s, and m=s+1. Simi-
larly, the constants c,, di, eq are determinable functions
of bo, ... , a .... a a,,x,gi,0i and S.
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345
ward sloping short run Phillips curve is
equivalent to the condition bo< 1 (an "elas-
ticity of expectations" less than unity).
The slope of the long run Phillips curve is
obtained by summing the coefficients co
+ - * * +Ck and dividing by one minus the
sum of the lagged unemployment terms,
el+ * * +em.
?
For k-=0, (11) implies that there will be
a long run Phillips curve if and only if there
is a short run Phillips curve, both cases
occurring whenever cO< . For k> 1, how-
ever, it is entirely possible that co<0 and
simultaneously cO+ ** +Ck=0, so that
the slope of the long run curve is zero.
In the next section, we report estimates
of the coefficients of (11) for the case k= 2,
n =1, m = 2-the values which, after some
experimenting, appeared to yield the
"best" results.11 Using this case as a
maintained hypothesis, we also test the
hypotheses Co+Cl+C2=0 and do+d,= 0.
In the testing and estimation, we assume
that (11) is disturbed by an error term
Et, where {Et } is a sequence of independent
co of
identically distributed random variables
with finite variance a2 and mean 0, inde-
pendent of contemporaneous values of
wt and Pt. Under these conditions, and
provided (11) is stable,'2 the estimated
coefficients will be consistent and asympto-
tically normal, and certain Chi-square
tests (described in detail below) will be
approximately valid.
II. Empirical Results.
In this section we report tests of (8) and
(11), on data series covering the period
1900-65. For the years 1900-60, the un-
employment series used is from Leber-
gott [7, p. 512] and for 1961-65, reported
census data are used [1, p. 236]. The price
series is the Consumer Price Index taken
11In terms of the parameters of (9), this case corre-
sponds to r =3 and s = 1.
12 The stability of (11) follows from the assumed sta-
bility of (6) and (9).
346 THE AMERICAN ECONOMIC REVIEW
TABLE 1-ESTIMATES FOR MODEL BASED oN EQUATIONS (5), (6) AND (7).a

Variable
Time Constant Aln(Pg) Aln(wg) (Ut.1) R2(Adj) DWS
Period

1904-65 2.32 -25.28 -21.72 .822 .832 1.44

(.57)*** (5.82)*** (10.18)* (.054)***

1904-29 4.04 -10.84 -29.75 .322 .370 1.67

(.95)*** (6.84) (12.21)** (.176)

1930-45 2.50 -70.80 4.19 .818 .953 2.21

(1.40) (8.73)*** (22.45) (.063)***

1946-65 4.15 -13.80 - 4.51 .249 .180 1.73

(1.37)*** (10.23) (12.74) (.208)

1930-65 4.2 -59 -41 .80 .925 1.50

from [91 (I.0)*** (8)*** (24) (.05)***

* ) ~~~~~~.025
** one tail significanceat .01
*;** ~~~~~.005
a The unemployment rate is measured as a percentage while the Aln variables are on
the order of magnitude of .01. The effect of a one percentage point increase in the rate of
inflation on the percentage unemployment rate is found by dividing the estimated
Aln(Pt) coefficients by 100. For example, for the period 1904-29 the coefficient of Aln(Pj)
is -10.84 which is interpeted to mean that when the inflation rate goes from, say, 0 per-
cent to 1 percent, the unemployment rate falls initially by about .11 percentage points.

from [1, p. 262] and [20]. Hourly com-
pensation was obtained by linking the
Lucas-Rapping [9] all economy hourly
money compensation series (1929-65) to
the Rees [20] series for manufacturing
(1900-29). 13
In Table 1 we report estimates of the
coefficients of (8) for the period 1904-65
(line 1), for three subperiods (lines 2-4)
and roughly comparable estimates for
1930-65 from [9] (line 5).14 The division
of the period into three subperiods is
arbitrary. We wish to separate the post-
war years to obtain comparability with
the many Phillips curve studies done for
this period. In view of the folklorereferring
to 1929 as "the end of an era," it seemed
another natural dividing point. Whatever
the reasons for this subdivision, however,
we think the readerwill agree after seeing
13 The data used in this paper are available upon re-
quest from the authors.
14 In [91, we measured price by the GNP deflator.
the results that it was fortunate that we
tried it.
In Table 1 standard errors are given
below each coefficientestimate. Each set of
estimates indicates a (short and long run)
Phillips curve with a quantitatively signi-
ficant negative slope. Thus for example,
leaving aside the question of statistical
significance, the estimated inflation term
for the period 1946-65 implies an initial
fall in the measuredunemployment rate of
about .14 percentagepoints per percentage
point increasein the inflation rate. Under a
sustained inflation, the final impact on
unemployment is .18 per percentage point
increase in the inflation rate [.1380/(1-
.249)]. The real wage rate has a statisti-
cally significant effect in the predicted
direction for the entire period and for the
1904-29 period, but not for the latter two
periods. There is an indication of serial
correlation in each regression.l"The Chi-
S5 We refer to the stated values of the Durbin-WVat-

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 LUCAS AND RAPPING: THE PHILLIPS CURVE 347

TABLE 2-ESTIMATES FOR MODEL BASED ON EQUATIONS (5), (6) AND (9).

R2
Constant Aln(Pt) Aln(Pt-1) Aln(Pt-2) Ahl(wt) Aln(wtt-1) Ut_1 Ut-2 (Adj) DWS
Period\

1904-65 1.15 -39.16 35.36 -17.38 -11.86 26.67 1.170 - .322 .876 2.01
(.63) (6.69)*** (8.19)*** (6.84)*** (9.19) (9.52)*** (.126)*** (.123)***

1904-29 2.12 -20.09 30.32 -12.61 -34.78 - 1.32 .680 .021 .532 1.91
(1.21) (8.11)** (9.07)*** (9.11) (13.52)*** (12.92) (.227)*** (.232)

1930-45 1.98 -96.87 5.97 -24.27 18.90 11.44 .423 .374 .966 1.87
(2.08) (15.49)*** (22.13) (13.04) (22.24) (21.50) (.277) (.286)

1946-65 5.55 -12.73 -13.20 7.00 - 15.05 -10.44 .247 - .147 - .05 1.94
(3.29) (17.29) (34.20) (15.48) (22.68) (30.39) (.305) (.275)

, } one tail significance at {?

square statistic for testing the stability
of the coefficients across the three sub-
periods takes the value 70.9, to be com-
pared to the .005 criticalvalue (8 degreesof
freedom) of 22.0.16 Hence the hypothesis
that the coefficients are equal in all sub-
periods is decisively rejected.
In turning to estimates for the more
complicated hypothesis (11) (with k=2,
n= 1, m= 2) reported in Table 2, we have
in mind three sets of questions. First, is
the additional complexity justified by
son statistic. Of course, the critical values tabulated by
these authors in [21do not apply to stochastic difference
equations as estimated here.
16 Let SSu and DF be the residual sum of squares and
the degrees of freedom under the maintained hypothe-
sis, let SS,, be the residual sum of squares under the null
hypothesis, and let df be the number of independent
restrictions imposed by the null hypothesis. The statis-
tic used is (DF)(SS.-SSQ/SSj2) which converges in dis-
tribution to a Chi-square with df degrees of freedom as
DF goes to infinity. In the subperiods, DF is as low as
8 in some of our tests, so caveat arbiter.
As an alternative test statistic, we conisideredthe F-
statistic based on SSn and SS.. Since the estimated
equations are stochastic difference equations, the test
is also at best approximately valid and the properties
of the latter approximation, while perhaps superior to
the one we used, are unknown. Similar considerations
led us to use unit normal, rather than Student's tables,
significance tests on the added coefficients?
Second, are the instability and serial
correlation which appear in the Table 1
estimates eliminated? Third, do the esti-
mates succeed in reconciling a downward
sloping short run Phillips curve with a
flat long run curve.
The estimates for the entire period, and
to a lesser extent for the subperiods, indi-
cate clearly that the additional lagged
inflation rates, rates of wage change, and
unemployment rates result in a significant
improvement."7 Further, serial correlation
appears to be absent from all regressions.
The instability across periods is, however,
still present as measured by the Chi-
square statistic 64.2, to be compared to
the .005 critical value (16 degrees of free-
dom) of 34.3. Thus, we must discuss the
results for each period separately, rather
than treat the first line of Table 2 as an
accurate Phillips curve for the entire
period. (It is fortunate that we chose
arbitrarily to split the data period since
there is no clue in the results on the first
line of Table 2 that the regression over the
whole period is dangerously misleading.)
17 The significance of coefficients of added variables is

to judge the significance of the estimates reported in the criterion we have uised to select the "best" of the
Tables 1 and 2. various instances of (11).

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348 THE AMERICAN ECONOMIC REVIEW
In the two subperiods, 1904-29 and
1930-45, indicated in Table 2 there is
evidence of a short run Phillips curve: the
coefficient of Aln(Pt) in each regression is
negative and significantly different from
zero. On the other hand, for the period
1946-65 there is no statistical evidence of a
short run Phillips curve, but this regression
does not improve on the comparable period
results reported in Table 1. To test for
the existence of a long run Phillips curve
we consider three null hypotheses. First,
the hypothesis that a sustained, con-
stant percentage rate of inflation has no
long run effect on unemployment is seen,
from (11), to require that the coefficients
of all price change variables (three in the
regressions reported in Table 2) add to
zero: we refer to this hypothesis (in Table
3, below) as Ho. The hypothesis that the
coefficients of the lagged wage changes
sum to zero is termed H1. Finally, let H2
be the hypothesis that both Ho and H1 are
true.
TABLE 3-CHI-SQUARE TESTS
Hypothesis
Tested IH, H1
Period
1904-65 x2 8.360*** 1.159
1904-29 x2 .095 3.051
1930-45 x2 23.497*** .702
1946-65 x2 .587 .279
01 significance
** Rejected at
Hypothesis :ReJect
Null tIypothesls
**,, f .005
Table 3 provides Chi-square statistics
for testing these hypothesis, for the entire
period and for each subperiod, within the
version of (11) reported in Table 2. In view
of the instability of coefficients across
periods, only the subperiod results appear
to be of interest. Table 3 shows that there
is no evidence of a long run Phillips curve
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over the first subperiod 1904-29. In this
period, the first-period impact of an in-
crease in the inflation rate is a decrease in
unemployment, but this initial effect is
counteracted in the second year with an
effect in the opposite direction. The third
period effect is again negative. Adding the
price change coefficients over the three
terms yields a negative estimate in this
case, but this sum does not differ signifi-
cantly from zero."8Similar remarks hold for
the wage change coefficients over the first
two periods.
The results for the second period, 1930-
45, indicate the presence of a long run
Phillips curve. But the results for the
1946-65 period are strikingly different.
For this period there is no evidence of a
long run relationship, a not too surprising
result in light of the fact that the individ-
ual coefficients are all statistically insig-
nificant in this period.
III. Conclusions
The objective of this paper has been to
articulate what we have called an expecta-
tions theory of the Phillips curve, and to
develop and test some of its implications.
H2
Our primary emphasis has been on the
possibility, strongly suggested by our
9.566** theory, that the Phillips curve is a short
3.819 run phenomenon, in the sense that a sus-
18 To estimate the slope of the long run Phillips curve,
24.627***
one divides the sum of the price change coefficients by
.942 one minus the sum of the lagged unemployment co-
efficients. This estimate can be large even in cases
where its numerator does not differ significantly from
zero. Thus, for example, for the period 1904-29 this
level.
estimate is - 7.96 which is smaller in absolute value
than the initial effect of -20.09 (Table 2). On the other
hand, for the periods 1930-45 and 1946-65 the long
run point estimates are -567.34 and -21.03 respec-
tively. These estimates are larger than the initial in-
flation impact as estimated by the leading inflation
term in Table 2. Of course, to the extent that the
lagged unemployment rates reflect the impact of
forces other than lagged inflation rates, we may sub-
stantially overstate the long run effect of inflation on
unemployment rates. A discussion of this and other
estimation problems in models such as ours can be found
in Griliches[5].
 LUCAS AND RAPPING: THE PHILLIPS CURVE
tained inflation will have a temporary but
not a long run effect on unemployment. As
reported in the last section, our results
show (1) that our particular expectations-
based Phillips curve is not stable over the
three (arbitrary) subperiods of the period
1904-65, (2) that a short run Phillips
curve exists in each subperiod, although
the relationship for the most recent period,
1946-65, is less statistically obvious than
for the earlier periods, and (3) that the
hypothesis that there is no long run Phil-
lips curve is accepted for the periods
1904-29 and 1946-65, but rejected for the
period 1930-45.
What is to be concluded from these
tests? As reported econometric models go,
ours can scarcely be called successful, but
we think its failures are suggestive along
several lines. First, it is clear that the exis-
tence of a short run Phillips curve is con-
sistent (in practice as well as in principle)
with the absence of a long run inflation-
unemployment tradeoff. Second, the ex-
pectations view as we have developed it
appears to have promise in the sense that
the additional explanatory variables it
suggests are frequently (though by no
means uniformly) significant. Third, and
most important, statistical Phillips curves
are highly unstable over time, and this
instability is far too serious to be dismissed
by a vacuous reference to structural
change in either 1929 or 1946. Until the
variables which are shifting these curves
can be identified, and verified as important
by testing over the entire period, we see no
alternative to the conclusion that empiri-
cal Phillips curves (ours included) are a
weak foundation on which to base policy
decisions.
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