New economic thinking and Ideas come after an unexpected event, disrupting previous belief systems and accepted models. The Great depression of the 1930s developed the ideas of John Mynard Keynes. Permanent inflation of the 1970s favored the monetarism idea of Milton Friedman. Global financial crisis of 2008 spurred interest in credit and banking sectors.
The pandemic and post pandemic years had its own lessons and implications for the economist. The American Economic Association (AEA) conference recently tried to recapitulate these new ideas.
One particular area of interest was the well-Known Phillips curve. According to the narrative, when unemployment is low, the inflation should be higher. The competition for workers increases the wages and this wage increase is then reflected into higher prices: inflation.
This Philips curve vanished during 2010s when both inflation and unemployment rates kept falling continuously. However, after the pandemic the negative correlation between inflation and employment appeared again. Inflation rose and unemployment subsided sharply.
The ideas and models are being developed to answer what happened to the Phillips curve last decade and why it turned back again after Pandemic.
At the AEA conference, Phillips curve was a hot matter of debate. Dr Guati Eggertsson suggested adding a kink to the Phillips curve and this would address the issue. The idea is that from a certain point, when the last available worker is employed, the relationship between unemployment and inflation suddenly becomes non-linear. This idea is not new however, in the 1970s, James Tobin the well-known Keynesian economist pointed out that given a nonlinear Phillips curve, and with different sectors growing and shrinking at different rates, inflation can take off without a hot labor market.
Source: Economist
