Simultaneous Fluctuations in Prices and Output-a Business Cycle Approach

Abstract

The coexistence in recent years of high rates of inflation and high levels of unemployment has focused attention on the problem of what the factors are that determine the manner in which variations in money income are divided up between variations in real income and employment on the one hand and in prices on the other. The hypothesis of a negative rate of trade-off between wage inflation (and hence presumably price inflation) and unemployment, embodied in the simple Phillips curve, has fallen into widespread disrepute in the face of this recent evidence.2 At the same time, more elaborate versions of the Phillips curve that allow for the influence of inflationary expectations, though they are compatible with this evidence, have commanded much less than universal acceptance. This paper first argues that there are a number of quite central questions about inflationary situations on which even sophisticated Phillips-curve analysis is silent. Second, it attempts to bring together orthodox post-Keynesian macro-economics and a species of Phillipscurve analysis in an extremely simple model of price and output fluctuations in terms of which the above-mentioned questions may be analysed; moreover, the model's predictions about the interaction of these variables appear to be of some empirical interest.