Straightening the Phillips Curve, 1968-76

Abstract

This paper looks at the change in the British Treasury’s macroeconomic thinking and policymaking between Friedman's statement of the natural rate doctrine in 1968 and Prime Minister Callaghan's public abandonment of Keynesian demand management in 1976. Simultaneously rising unemployment and inflation meant that the Treasury was sceptical about the old Phillips curve from the start, but, far from moving smoothly to the expectations-augmented version, it hesitated between (i) assuming the curve had shifted outwards (ii) abandoning any idea of a Phillips curve (iii) adhering to a ‘New Cambridge' curve where unemployment made inflation worse. Eventually money illusion was abandoned by a majority vote at a tense Treasury meeting.