April 25, 2003

The Phillips Curve and the Classical Model

In considering the implications of the Classical Model and the IS/LM Model for the Phillips curve, we made a translation between output Y and the unemployment rate UR and between the price level P and the rate of inflation (pi).

A strict interpretation of the Classical Model would imply a vertical Phillips curve located on the vertical axis because the Classical Model implies an unemployment rate of zero.

We can introduce unemployment into the Classical Model in the form of frictional unemployment. That is, people are unemployed as they change jobs. In times of low Y, this period might be lengthy as it takes some time to find a good employment opportunity. In times of high Y, the time spent searching for a new job might be small. Some mechanism of this sort is needed to translation low levels of Y into high (nonzero) levels of unemployment.

Posted by bparke at April 25, 2003 12:46 AM