testimony
Phelps: anticipation shifts the whole curve (1967) Phelps's expectational mechanism in his own words — once participants learn to expect inflation, their anticipatory behaviour shifts the Phillips Curve upward by the full amount of expected inflation. The conceptual core of the expectations-augmented Phillips Curve.
From the 1967 Economica paper, stating why a chosen inflation rate fails to hold once it is anticipated.
But if the statical “optimum” is chosen, it is reasonable to suppose that the participants in product and labour markets will learn to expect inflation (and the concomitant money wage trend) and that, as a consequence of their rational, anticipatory behaviour, the Phillips Curve will gradually shift upward (in a uniform vertical displacement) by the full amount of the newly expected and previously actual rate of inflation.
The mechanism is the engine of the natural-rate result. A government that picks the static “optimum” point on a given Phillips Curve sets a rate of inflation; market participants come to expect that rate; and because they build it into wage and price decisions, the curve they actually face slides up by the full amount they now anticipate. The trade-off the government thought it had purchased evaporates as soon as it is foreseen. Two features are worth marking. The displacement is one-for-one — Phelps does not leave room for a permanent partial trade-off. And the word “rational” appears years before Lucas and Sargent built rational expectations into a formal program: Phelps’s agents are forward-looking and anticipatory, even if his expectations are not yet the full model-consistent rational expectations of the mid-1970s.
Edmund Phelps , 1967. Edmund S. Phelps, 'Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time,' Economica, New Series, 34(135), p. 255, August 1967. . source ↗
Tradition Monetarist Moment Phelps's 1967 Expectations-Augmented Phillips Curve Speaks to What causes inflation? Last updated 2026-06-15