The Phillips curve and the NAIRU: a reinterpretation

This paper criticises the use of partial equilibrium analysis in new Keynesian explanations of wage and price stickiness, specifying the Phillips curve as a structural equation (rather than the outcome of the monetary transmission process), and using comparative static ad hoc models to characterise the dynamic trade-off. An intertemporal optimisation model with imperfect competition is solved to generate a dynamic Phillips curve. The predicted wage inertia and impact effects on employment accord with empirical evidence on the effects of monetary policy. The employment dynamics allow an alternative interpretation of the NAIRU relative to the ‘natural rate of unemployment’ (NRU).