Issues Regarding the Inclusion of the Real Interest Rate with other factors in Phillips Curve Analysis

Abstract

This paper summarizes the arguments and counterarguments within the scientific discussion on the issue regarding the Inclusion of the Real Interest Rate with other factors in Phillips Curve Analysis. The main purpose of the article is to cause economists to consider the inclusion of the real interest rate in Philips Curve analysis. Earlier economists have examined the Phillips Curve, including Irving Fisher (1926). Later Phillips (1958, 1961) made enough of impression to give the Phillips Curve its appellation (1958, 1961). Further work has been done by Freidman, Phelps Lucas, Rapping and others. Shifts from the Short Run Phillips Curve (SRPC) to the Long Run Phillips Curve (LRPC) have been explained primarily through workers not realizing their real wage has decreased until some time has passed. Also, this shifting from the SRPC to the LRPC is due to producers thinking that demand for their products has had a real, sustained increase, producers finally realize that is not true. This article agrees with those factors being present but also posits the idea of changes in the real interest rate affecting the shift form the SRPC to the LRPC. This brief article summarizes the conclusions of five econometric papers that suggest that the real interest rate should be included in Phillips Curve Analysis. The research empirically confirms and theoretically proves that the five articles with econometric evidence suggest that the real interest rate be included in Phillips Curve Analysis. Though Austrian economists consider capital in their theories, Austrian economists do not use Phillips Curve analysis but instead employ Hayekian Triangles. The results of the research shows that inflation and unemployment have a stable and inverse relationship. These results can be useful for economic analysts, government, financial experts, policymakers.