<p>Every equation is just a sentence written in logical abstract language. Hence, to interpret it you just need to correctly read it out. The following sentence:</p>
<p><span class="math-container">$$π= E[π] + \frac{1}{\alpha}(y-\bar{y}) +v,$$</span></p>
<p>just says that inflation <span class="math-container">$\pi$</span> positively and linearly depends on people's expectation of what the inflation is (<span class="math-container">$E[\pi]$</span>). It also positively and linearly depends on output gap <span class="math-container">$(y-\bar{y})$</span> (i.e. observed output - output at full employment), and the strength of influence of the output gap depends on parameter <span class="math-container">$\alpha$</span> (higher alpha means output gap is less relevant for inflation).  I presume <span class="math-container">$v$</span> are the idiosyncratic shocks (e.g. errors) which just says that random economic shocks may further affect inflation. Moreover, the equation also shows that the relationship is additive (as opposed to let's say multiplicative relationship).</p>

CC BY-SA 4.0
2022-01-13T16:39:07.573Z
Thank you very much, this was very helpful
sofi
CC BY-SA 4.0
2022-01-13T16:39:32.877Z
@sofi you are welcome if this answered your question consider accepting it
1muflon1
CC BY-SA 4.0
2022-01-14T08:33:45.617Z
The equation actually says more than that, viz. inflation depends positively *and linearly* on these components, and that the effects are *additive*, and a little bit more...
VARulle
CC BY-SA 4.0
2022-01-14T08:55:56.063Z
@VARulle you are right I expanded my answer, thanks for the remark
1muflon1
CC BY-SA 4.0
2022-01-13T16:37:11.270Z
2022-01-14T08:55:57.357Z
2022-01-14T08:55:57.357Z
1muflon1
<p>I wanted to ask how do we give economic interpretation or meaning to expressions like the Phillips curve.
So what is the economic interpretation of the Phillips curve
π= Eπ + 1/α(y-ȳ) +v?</p>

<macroeconomics>
Economic interpretation
sofi
# Economic interpretation

(Asked by: username_0 on 2022-01-13)

I wanted to ask how do we give economic interpretation or meaning to expressions like the Phillips curve.
So what is the economic interpretation of the Phillips curve
π= Eπ + 1/α(y-ȳ) +v?

**Tags:** macroeconomics


---

## 1 answers

### Answer by username_1 on 2022-01-13. Score: 1 | Accepted answer

Every equation is just a sentence written in logical abstract language. Hence, to interpret it you just need to correctly read it out. The following sentence:

$$π= E[π] + \frac{1}{\alpha}(y-\bar{y}) +v,$$

just says that inflation $\pi$ positively and linearly depends on people's expectation of what the inflation is ($E[\pi]$). It also positively and linearly depends on output gap $(y-\bar{y})$ (i.e. observed output - output at full employment), and the strength of influence of the output gap depends on parameter $\alpha$ (higher alpha means output gap is less relevant for inflation). I presume $v$ are the idiosyncratic shocks (e.g. errors) which just says that random economic shocks may further affect inflation. Moreover, the equation also shows that the relationship is additive (as opposed to let's say multiplicative relationship).

> **Comments:**
> **username_0**: Thank you very much, this was very helpful  
> **username_1**: @username_0 you are welcome if this answered your question consider accepting it  
> **username_2**: The equation actually says more than that, viz. inflation depends positively *and linearly* on these components, and that the effects are *additive*, and a little bit more...  
> **username_1**: @username_2 you are right I expanded my answer, thanks for the remark  

---

