The Taylor Curve and the Unemployment-Inflation Tradeoff

Satyajit Chatterjee

Vice President and Economist

Q3 2002

Business Review — In the past, monetary policy options were described in terms of a tradeoff between the unemployment rate and the inflation rate, the so-called Phillips curve. Macroeconomists no longer view the Phillips curve as a viable “policy menu” because its use as such is inconsistent with mainstream macroeconomic theory.

In the late 1970s, John Taylor suggested an alternative set of options for policymakers to consider, one consistent with macroeconomic theory. These alternative options involve a tradeoff between the variability of output and the variability of inflation. Satyajit Chatterjee explains the logic underlying this new variability-based policy menu and discusses its implications for the conduct of monetary policy.

This article appeared in the Third Quarter 2002 edition of Business Review.

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