SYSTEM DYNAMICS MODEL OF THE ORIGINAL PHILLIPS CURVE

An empirical inverse relation is argued between wage inflation and unemployment rate by Phillips(1958). This relation is later called Phillips Curve and interpreted as a trade-off between inflation and unemployment. In this study, we argue that the trade-off interpretation is incorrect and there is a disequilibrium explanation for the empirical inverse relation. We propose a system dynamics model which explains the phenomena and discuss the simulation results.