Phillips Curve Calculator

What is the Phillips Curve?

The Phillips Curve is an economic concept developed by A.W. Phillips that describes an inverse relationship between inflation and unemployment. Historically, economic theory suggested that lower unemployment in an economy is associated with higher rates of inflation, and vice versa.

Expectations-Augmented Phillips Curve Formula

Modern macroeconomic theory uses the expectations-augmented Phillips Curve, which accounts for inflation expectations and supply-side shocks:

$$\pi = \pi_e - \alpha(u - u_n) + v$$

Where:

• $\pi$ is the actual inflation rate.
• $\pi_e$ is the expected inflation rate.
• $\alpha$ is the responsiveness coefficient of inflation to unemployment gap ($\alpha > 0$).
• $u$ is the actual unemployment rate.
• $u_n$ is the natural rate of unemployment (NAIRU).
• $v$ represents exogenous supply shocks (such as oil price spikes).

Short-Run vs. Long-Run Phillips Curve

In the short run, trade-offs exist between inflation and unemployment because workers and firms have fixed inflation expectations. However, in the long run, the Phillips Curve becomes vertical at the natural rate of unemployment ($u_n$), meaning monetary policy cannot permanently keep unemployment below $u_n$ without triggering accelerating inflation.