Dynamic concept Monetary policy U. S.

Phillips curve and open system

The unemployment rate in the U. S. has reached low enough to be full employment, yet the inflation stays low. The Fed is “puzzled” by why inflation can not take off as the economy theory, such as Phillips curve predicts.

I think the problem is that many economists do not understood System Theory. System Theory classifies systems into open systems and close systems. The Phillips curve theory, which basically says that tightening labour market will lead to inflation, was developed implicitly assuming that the economic entity in question is a CLOSE system. With globalization the assumption of a close system is no longer valid for the U. S. economy. In an open system, Phillips curve theory may not be true any more.

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