Thought experimentation and the Phillips curve

This paper offers the rationale for presenting a particular type of Phillips curve and develops the dynamic behavior of an economy where such a Phillips curve relation is observed. The specific kind of relation that is explored has similarities with the sticky-information Phillips curve of the Mankiw–Reis framework. Nevertheless, it adds an important dimension: firms need to form expectations about current events on past time periods not because of infrequent optimal updating of information but because producers want to evaluate the possibility of taking advantage of information deficiencies on the consumers’ side. A positive probability of ‘fooling’ consumers with a price above the one imposed by market conditions re-shapes the dynamic relation between the inflation rate and the output gap.

► The paper reinterprets the Phillips curve relation. ► Producers evaluate the possibility of taking advantage of consumers’ information deficiencies. ► The new Phillips curve incorporates the sticky-information Phillips curve as a particular case. ► Stability conditions relating the aggressiveness of monetary policy are derived.