Targets, Tradeoffs, and Economic Policy: a Generalized Phillips Curve

Frank Bechling recently wrote that "the concentration on the trade-off between unemployment and inflation and the neglect of trade-offs between unemployment and other variables (balance of payments, economic growth, structural change, and income distribution) may lead to a suboptimal choice between inflation and unemployment. " Starting from this proposition, this paper uses a simple yet believable model to construct simulated short-run transformation curves for major economic objectives. One of these curves is the familiar Phillips curve relation between inflation and unemployment. Proper design of policy demands knowledge of subjective preferences, as well as objective tradeoffs, among economic goals. A tentative empirical method for investigating preferences is set out, along with some initial findings.