a single-equation econometric model, named after William Phillips (a Kiwi!), describing a historical inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy.
The Phillips Curve provides the “intellectual” justification for Keynsian central bankers to meddle through monetary policy.
Don’t believe TAFKAS? Perhaps let the RBA advise:
The Phillips curve is clearly a useful empirical device for examining the determinants of inflation in Australia. It also, however, provides an intellectual framework for the analysis of monetary policy. In this section, we discuss the intellectual development of the Phillips curve framework within the Reserve Bank of Australia, and particularly within its Research Department. This is of particular interest because many of the Australian empirical studies of the Phillips curve came from this part of the Reserve Bank. It also seems likely that the ideas formulated in this research would have had an influence, perhaps after some time, on the formulation of monetary policy in Australia.
The Phillips Curve remains the basis of thinking within many central banks, including the US Federal Reserve:
The Phillips Curve is one key factor in the Federal Reserve’s decision-making on interest rates. The Fed’s mandate is to aim for maximum sustainable employment — basically the level of employment at the NAIRU— and stable prices—which it defines to be 2 percent inflation. Because monetary policy acts with a lag, the Fed wants to know what inflation will be in the future, not just at any given moment. The Phillips Curve is a tool the Fed uses to forecast what will happen to inflation when the unemployment rate falls, as it has in recent years.
Given recent economic history, it is fair to ask whether the inflation rate-unemployment rate relationship predicted in Phillips’ model still holds – especially given the constant redefinition of inflation and unemployment (hedonic adjustments anyone?). But never let the failure of an economic model and hypothesis get in the way of a bunch of Keynesian technocrats who want to tinker with an economy.
PS – Stable prices. Ha! 2-3% inflation. How’z that for stable. Imagine building a house on a “stable” foundation that moves 2-3% every year.