Escalators and Elevators: A Phillips Curve for Keynesians

Abstract

The negatively sloped long-run Phillips curve remains an issue of contention. This paper presents a theoretical model of the Phillips curve in which nominal demand growth reduces unemployment caused by stochastic shifts of demand between sectors.' The model can be understood through the following metaphor. Keynesian economies are economies in which markets adjust back to equilibrium slowly, so that nominal demand growth presents a means of speeding up the escalator process. Contrastingly, new classical economies, as set forth by e.g. Lucas (1973), are economies in which adjustment is instantaneous. Consequently, there is no role for nominal demand growth in the adjustment process, and to the extent that policy sponsored nominal demand growth is uncertain, it may actually disrupt the economy by sending the elevator to the wrong floor.

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