This chapter has examined how economists’ thinking about inflation and unemployment has evolved. We have discussed the ideas of many of the best economists of the 20th century: from the Phillips curve of Phillips, Samuelson, and Solow, to the natural-rate hypothesis of Friedman and Phelps, to the rational expectations theory of Lucas, Sargent, and Barro. Four of this group have already won Nobel prizes for their work in economics, and more are likely to be so honored in the years to come.
Although the trade-off between inflation and unemployment has generated much intellectual turmoil, over the past half century, certain principles have developed that today command consensus. Here is how, Milton Friedman expressed the relationship between inflation and unemployment in 1968:
There is always a temporary trade off between inflation and unemployment; there is no pennant trade off. The temporary trade off comes not from inflation per generally means from a rising rate of inflation. The widespread belief that there is a permanent trade off is a sophisticated version of the confusion between high and rising that we all recognize in simpler forms. A rising rate of inflation may reduce unemployment, a high rate will not.
But how long, you will say, is temporary? .I can at most venture a personal judgment, based on some examination of the historical evidence, that the initial effects of a higher and unanticipated rate of inflation last for something like two to five years.
Today, about 40 years later, this statement still summarizes the view of most macroeconomics, but from unanticipated inflation