Ah, do we not all wish to return to a time when economics was much simpler, when it was thought that there was a simple trade-off between inflation rate and unemployment rates, when the original Phillips curve worked well, when stagflation had yet to be coined and experienced, when non-accelarating inflation rate of unemployment was unheard of and the days when Keynesian economics reigned before it was blown into pieces by the 1970s crisis?
Well, it is back!
Finally, a return to the good old undergraduate textbook economics problem!
KUALA LUMPUR, July 21 — Malaysia’s consumer price index (CPI) is likely to have fallen in June from a year earlier by 1.35 per cent, the first annual decline in two decades… [Malaysia CPI set for first fall since 1986. Bernama via The Malaysian Insider. July 21 2009]
The original Phillips curve states that there is a inverse relationship between unemployment rate and inflation rate. The unemployment was at 4.0% in the first quarter of the year, much higher than the previous quarter (3.1%).[1] Given that the unemployment rate for 2008 was 3.3%, it is not hard to show that 4.0% is a stark increase even on year-on-year basis. And so, when deflation occurs, along with heightened unemployment rate, the environment fits into the original Phillips curve.
Anyway, enjoy it while it lasts because…
…although a period of deflation is expected to be short lived. [Malaysia CPI set for first fall since 1986. Bernama via The Malaysian Insider. July 21 2009]
Yup. The celebration for the original Phillips curve will not last long. Thank heavens for Edmund Phelps and Milton Friedman’s works!
Phelps, winning the Prize in Economics because of it, introduced and expected-augmented Phillips curve. It basically says that while the inverse relationship between inflation and unemployment rates still hold in the future, when inflation expectation change, the whole curve will shift. Or, in other words, inflation (or rather, monetary policy) does not affect the real economy in the long run.
[1] — Please refer to the following table:
|
Employment
|
2008 3rd Quarter
|
2008 4th Quarter
|
2008
|
2009 1st Quarter
|
| Total Labour Force (‘000) |
11,123.4
|
11,170.8
|
11,028.1
|
11,208.5
|
| Employed (‘000) |
10,779.7
|
10,819.8 |
10,659.6
|
10,757.8
|
| Unemployed (‘000) |
343.7
|
351.0
|
368.5
|
450.7
|
| Unemployed Rate (% of Labour Force) |
3.1
|
3.1
|
3.3
|
4.0
|
[Employment (Updated 30 June 2009). Department of Statistics of Malaysia. Accessed July 21 2009]