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The Phillips Curve is the negative relationship between unemployment and inflation. If you want to have less unemployment the cost is inflation.
In this sense, you can also say that there is a positive relationship between output and inflation, because output is negatively correlated with unemployment (firms need workers to produce more).
The first thing you have to kept in mind is that the Phillips relation is only true for shocks in Aggregate Demand. For instances, when the U.S. suffered from stagflation on the 70s (inflation and low output - or inflation and higher unemployment) the evidence showed that not always the Phillips curve are right. In this case, the oil shocks affected suppliers costs and thus the Aggregate Supply.
Given this, the Phillips Curve holds in the short-run for any shock on AD.
In the long-run the production (unemployment) of an economy depends on its inputs abundance and their efficiency, independently of the nominal variables (like prices, inflation, etc.). So the Phillips curve is an horizontal line, the natural unemployment is independent of the inflation!
Gustavo Almeida, Portugal, gdireitinho@gmail.com
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