The Modern Phillips Curve Revisited

Abstract

The modern Phillips curve is about the relationship between the average rates of inflation and unemployment. We will provide additional empirical evidence in the US economy from 1948:01 to 2013:03 that helps demonstrate why such a relationship has been built on a wrong methodology, as revealed in Ma [1]. An erroneous approach can lead to a misunderstanding of business cycles and a wrongful implementation of monetary policy. In particular, the way how the two rates may evolve is now at a critical moment for the Fed to decide if an exit from its quantitative easing should be initiated.