Share This Article:

A Microeconomic Foundation for the Phillips Curve under Complete Markets without any Exogenous Price Stickiness: A Keynesian View

Abstract Full-Text HTML XML Download Download as PDF (Size:129KB) PP. 482-486
DOI: 10.4236/tel.2012.25090    4,030 Downloads   5,983 Views   Citations

ABSTRACT

Assuming that labor productivity varies with the previous employment level, we derive the Phillips curve based on the standard dynamic microeconomic foundation. The usage of the term standard implies that our theory entirely excludes assumptions unfamiliar to microeconomics such as price or information stickiness, and money in the utility function. We find that when labor productivity decreases, disinflation advances. This is because disinflation, ceteris paribus, limits the current goods supply and increases the rate of return on money (the inverse of the inflation rate) in an overlapping generations (OLG) model. In addition, mass unemployment becomes a hazard for the intergenerational skill transformation, and thus, the higher the unemployment is, the lower the labor productivity becomes in the stationary state. Consequently, the negative correlation between inflation and unemployment emerges even in the dynamic general equilibrium in complete markets. It is also noteworthy that we depend neither on linear approximations nor on numerical methods: the method used to derive the Phillips curve is purely analytical.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

M. Otaki and Y. Tamai, "A Microeconomic Foundation for the Phillips Curve under Complete Markets without any Exogenous Price Stickiness: A Keynesian View," Theoretical Economics Letters, Vol. 2 No. 5, 2012, pp. 482-486. doi: 10.4236/tel.2012.25090.

References

[1] R. E. Lucas Jr., “Expectations and the Neutrality of Money,” Journal of Economic Theory, Vol. 4, No. 2, 1972, pp. 103-124. doi:10.1016/0022-0531(72)90142-1
[2] G. A. Calvo, “Staggered Prices in a Utility-Maximizing Framework,” Journal of Monetary Economics, Vol. 12, No. 3, 1983, pp. 383-398. doi:10.1016/0304-3932(83)90060-0
[3] M. Woodford, “Control of the Public Debt: A Requirement for Price Stability?” NBER Working Papers, 1996.
[4] N. G. Mankiw and R. Reis, “Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve,” Quarterly Journal of Economics, Vol. 117, No. 4, 2002, pp. 1295-1328. doi:10.1162/003355302320935034
[5] M. Friedman, “The Role of Monetary Policy,” American Economic Review, Vol. 58, No. 1, 1968, pp. 1-17.
[6] A. W. Phillips, “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957,” Economica, Vol. 25, No. 100, 1958, pp. 283-299.
[7] F. Hayashi and E. C. Prescott, “The 1990s in Japan: A Lost Decade,” Review of Economic Dynamics, Vol. 5, No. 1, 2002, pp. 206-235. doi:10.1006/redy.2001.0149
[8] M. Otaki, “The Dynamically Extended Keynesian Cross and the Welfare-Improving Fiscal Policy,” Economics Letters, Vol. 96, No. 1, 2007, pp. 23-29. doi:10.1016/j.econlet.2006.12.005
[9] M. Otaki, “A Welfare Economics Foundation for the Full-Employment Policy,” Economics Letters, Vol. 102, No. 1, 2009, pp. 1-3. doi:10.1016/j.econlet.2008.08.003
[10] I. M. McDonald and R. M. Solow, “Wage Bargaining and Employment,” American Economic Review, Vol. 71, No. 5, 1981, pp. 896-908.
[11] K. J. Arrow, “The Economic Implications of Learning by Doing,” Review of Economic Studies, Vol. 29, No. 3, 1962, pp. 155-173. doi:10.2307/2295952
[12] L. P. Hansen and K. J. Singleton, “Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns,” Journal of Political Economy, Vol. 91, No. 2, 1983, pp. 249-265. doi:10.1086/261141
[13] J. Y. Campbell and N. G. Mankiw, “Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence,” NBER Macroeconomics Annual, Vol. 4, 1989, pp. 185-216. doi:10.2307/3584973

  
comments powered by Disqus

Copyright © 2019 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.