May 19, 2011 Reading Time: < 1 minute

“William Niskanen (2002) estimated a Phillips curve for the United States using annual 1960–2000 data. By adding one-year lagged terms in unemployment and infl ation, he was able to show that this familiar equation is misspecified. In his improved specification, Niskanen found that the immediate impact of inflation is to reduce unemployment, confirming the traditional understanding of the Phillips-curve relationship, but also fi nding that after an interval as short as one year infl ation has generally been followed by increased unemployment. Though Niskanen was perhaps unaware of it, his results lend strong support to the Austrian model of the business cycle. In that model, credit expansion results in a temporary but unsustainable expansion. Unemployment is lowered in the short run, but once the policy-induced malinvestment is recognized, total output and income will be permanently reduced, and unemployment will increase.” Read more.

“An Austrian Rehabilitation of the Phillips Curve”
Robert F. Mulligan
Cato Journal, Vol. 21, No. 1, Winter 2011.
Via the Cato Institute.

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