Question

Would you expect to see long-run data trace out a stable downward-sloping Phillips curve?

Short answer

No, the Phillips exists, but only for a period of less than ten years.

Step-by-step solution

Content Introduction

Phillips studied $60$years of British data to discover the trade off between unemployment and inflation described in Keynesian theory, which became known as the Phillips curve. The Phillips curve was viewed as a policy menu in the $1960$s. A country could choose between low inflation and high unemployment, or vice versa.

Changes Happened

When policymakers attempted to exploit the inflation-unemployment trade-off, both inflation and unemployment rose. The Phillips curve began to shift. This pattern was seen in the US economy during the deep recession from $1973$to $1975$, as well as in back-to-back recessions from $1980$to $1982$. Many countries experienced similar increases in unemployment and inflation. Stagflation arose as a result of this pattern.

When people expect no inflation, there may be a trade off between inflation and unemployment; however, when they realize inflation is occurring, the trade off disappears. Both supply shocks and changes in inflationary expectations cause the aggregate supply curve and, as a result, the Phillips curve to shift.

Conclusion

A downward-sloping Phillips curve should be interpreted as valid for several years in the short run, but over longer periods—when aggregate supply shifts—the downward-sloping Phillips curve can shift so that unemployment and inflation are both higher.