Aslo, a few links are below.

From BusinessWeek in 1997   http://www.businessweek.com/1997/30/b353757.htm
COMMENTARY: IN THE NEW ECONOMY, THE OLD RULES STILL LIVE

            These are tough times for traditional inflation theory. A
soaring U.S. economy,
            fueled by the forces of globalization and technology, has
pushed joblessness
            down to levels not seen in decades. But consumer inflation
remains tame, and
            producer prices are actually falling. Convinced that the New
Economy can
            continue along this course, investors have bid the stock market
to new highs.

            But there's a more classical view of the economy that still
should be heeded.
            Virtually all mainstream economists say it's too early to scrap
economic theories
            that for decades have reliably predicted inflation. Ignoring
these basics is
            especially risky in a high-flying financial climate that is
sensitive to Federal
            Reserve policy decisions.

            INFLATION AND JOBS. First, a review of the Econ 101 lectures
you may
            have slept through. The topic: Phillips curve theory and the
concept of NAIRU, a
            clunky acronym for ''non-accelerating-inflation rate of
unemployment.'' Together,
            these relate joblessness and inflation--NAIRU being the jobless
rate at which
            inflation is stable. The Phillips curve/NAIRU model suggests
that inflation is
            caused by excess demand--demand beyond what available workers and
            machines can satisfy. The excess occurs when the jobless rate
dips below
            NAIRU, causing wages and inflation to accelerate. But the
process doesn't end
            there. Higher inflation reduces demand and labor markets
readjust, pushing
            joblessness back to the NAIRU level. But the inflation persists
at the higher level,
            partly because people adjust to it.

            Despite the current, unusual situation of low unemployment and
low inflation, the
            old model is alive and well among economists--and at the Fed.
''I am a strong
            and unapologetic proponent of the Phillips curve and the NAIRU
concept,'' says
            Federal Reserve Governor Laurence H. Meyer. Chairman Alan
Greenspan,
            warming to the New Economy, is less enamored. But he
appreciates the model's
            solid track record.

            The Phillips/NAIRU model has practical limitations. But
understanding those
            limits doesn't mean junking the theory. The model can still
work, but it's crucial to
            peg the level of NAIRU--a moving target. Before globalization
and technology
            pushed NAIRU below 6% a few years ago, the model had a
two-decade run as
            one of forecasters' best-performing tools. Now NAIRU may be
even lower than
            the generally accepted range of 5 1/2% to 5 3/4%.

            It can take a year or more for inflation to pick up after a gap
opens between the
            unemployment rate and NAIRU. That's why the Fed's experiment to
test the
            economy's inflationary limit is dangerous. The wider the gap,
the more inflation
            will rise--and it will not fall until the jobless rate exceeds
NAIRU. That is, until the
            Fed steps in to clamp down on the economy, thus throwing a lot
of people out of
            work.

            ECONOMIC WINDFALLS. Another consideration: The Phillips/NAIRU
            model cannot reflect good economic luck, and this U.S. business
cycle has had
            more than its share: falling oil prices, a stronger dollar, and
weaker growth among
            overseas competitors. Also, a slowdown in benefit expenditures
has curbed labor
            costs, even as wage growth has picked up--as the model predicts.

            Right now, the model does not forecast any strong pickup in
inflation. But for
            every half point the jobless rate stays below NAIRU for a year,
inflation will
            accelerate by a quarter point. And a stronger second half could
send the
            unemployment rate even lower.

            That's great--if you're seeking employment. But traditional
inflation theory says
            that, if the Fed's current gamble with tight job markets fails,
the costs of excess
            demand now will be foregone output and income later on. Even in
the New
            Economy, the old approach to gauging future inflation should
scarcely be
            ignored--it should be embraced.

            By James C. Cooper


                        Updated July 17, 1997 by bwwebmaster
              Copyright 1997, by The McGraw-Hill Companies Inc. All rights
reserved.
                                Terms of Use

LINKS

I) My colleague Brad DeLong has a nice multimedia demonstration.  Check out
his site, being sure to let pages run for a minute or 2:
http://econ161.berkeley.edu/multimedia/PCurve1.html

II) A British on-line model of the economy has two articles / sub-sites:
 1. Unemployment Theories - Phillips Curve - Is unemployment inflated?
http://bized.ac.uk/virtual/economy/policy/outcomes/unemployment/unempth4.htm

and  2. Inflation Worksheet - The Phillips Curve - Trading off
 unemployment and inflation
http://bized.ac.uk/virtual/economy/policy/outcomes/inflation/inflws2.htm

III) Nouriel Roubini has an overview article and additional links to the
current debate on NAIRU and limits to growth at
http://equity.stern.nyu.edu/~nroubini/NAIRU.HTM


David I. Levine                 Associate professor
Haas School of Business    ph: 510/642-1697
University of California    fax: 510/643-1420
Berkeley CA  94720-1900                            email:
levine@haas.berkeley.edu
http://web.haas.berkeley.edu/www/levine/