The Taylor Curve and the Unemployment-Inflation Tradeoff

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The Taylor Curve and the Unemployment-Inflation Tradeoff

In "The Taylor Curve and the Unemployment-Inflation Tradeoff," Satyajit Chatterjee explains why developments in macroeconomic theory during the 1970s caused the Phillips curve, which posited a tradeoff between the unemployment rate and the inflation rate, to lose favor as a menu of policy options. Chatterjee evaluates the Taylor curve, based on a tradeoff between the variability of output and the variability of inflation, as an alternative monetary policy menu.

What factors determine the natural rate of unemployment?
According to the theory of the natural rate of unemployment, what can cause an unexpected increase in the inflation rate? What happens to the actual unemployment rate when this occurs? Will an expected increase in the inflation rate have the same effect on the unemployment rate? Why?
What are the implications of the theory of the natural rate of unemployment for the Phillips curve?
According to the Taylor curve, what tradeoff faces policymakers? Why? What advantage does the Taylor curve have compared to the Phillips curve?
In what ways do the variability of inflation and output affect individuals?
Why does Chatterjee question Taylor’s recommendation to give equal weight to stabilizing inflation and output?

Source: “The Taylor Curve and the Unemployment-Inflation Tradeoff.” Satyajit Chatterjee, Federal Reserve Bank of Philadelphia Business Review, Third Quarter 2002, pp. 26-33.

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