Phillips Curve obtained obtained from the empirical data for the period !861 1957 by AW Phillips, indicates a stable and negative relationship between unemployment and inflation. The explanation was that the extra spending raises the demand for labor which in turn causes a shrinkage in the unemployment pool, and therefore causes an increase in nominal wage.As the cost of production goes up the increase in wage gets translated into inflation.. Therefore Phillips curve questions the Keynesian wisdom regarding public policy that economy can recover from recession through increased public spending. The policy was in currency during 1940s and 50s following its successful implementation in US economy (New Deal of President Roosevelt). Such spending would raise the aggregate demand and level of employment. Further, inflation will be caused by such extra spending only when it is undertaken after economy attains full employment. Meaning thereby an extra investment in the economy that raises the level of income and employment is not accompanied by inflation (at least demandpull inflation) till economy attains full employment. Phillips curve offers the contrary evidence. But still it helped poly makers to target one variable by choosing certain level of other (variables being unemployment and inflation). The policy is called stopgo policy. But by the 1970s the Phillips curve itself called to question when many western economies experienced the inflation along with unemployment. As a result many explanations were offered by Monetarists and Newclassical economists, and eventually what emerged as successful policy option was the supply side management.
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