THE TRADE-OFF IS DEAD, LONG LIVE THE TRADE-OFF: PHELPS AND THE PHILLIPS CURVE

This paper compares two closely related contributions of Phelps on the Phillips curve, which were published in 1967 and 1968. It is shown that Phelps incorporated elements of the early Phillips curve literature such as the possibility of sectoral disequilibria and of involuntary unemployment at macroequilibrium in his models, while the importance of cost- push inflation is rejected. The latter criticism is in line with Friedman, though Phelps and Friedman draw decisively different policy conclusions: While Friedman's criticism of the Phillips curve implied to not make use of such a trade- off even if it existed in the short run, Phelps explicitly discussed the options for economic policy with respect to the remaining choice between unemployment and inflation.