The Phillips Curve, Macroeconomic Policy, and the Welfare of Canadians

Abstract

A review of the two competing paradigms explaining inflation and unemployment fluctuations singles out the Keynesian Phillips curve as the clear empirical winner over its classic competitors. Reestimation of the Canadian Phillips curve for 1957-90 identifies a sharp structural shift toward a high degree of unemployment hysteresis after 1972. The recent attempt of macropolicy to flatten the aggregate demand curve and limit supply-side shock accommodation, which aims at lower and more stable inflation, is then shown to make unemployment higher and more unstable on average, to an extent that is an increasing function of the degree of hysteresis. Understanding and reducing hysteresis and developing a consensus-based incomes policy that has a chance of alleviating the dismal trade-off should therefore to top research and policy priorities.