Most economic models used by central banks prior to the recent financial crisis omitted two fundamental elements: financial markets and liquidity measures. Those models therefore failed to foresee the crisis or understand the policy reaction that followed. In contrast to more orthodox models, we...

The Phillips curve refers to a negative (or inverse) relationship between unemployment and inflation in an economy—when unemployment is high, inflation tends to be low, and vice versa. This inflation-unemployment link has been observed in many countries during many times, most famously by...