Testing the Phillips Curve: Inflation or Unemployment? Evidence from a Behavioral Experiment

Abstract

The central thesis of the Phillips Curve is that inflation leads to less unemployment. The link between inflation and employment has been tested empirically many times using econometrics but never by behavioral science. The purpose of this paper is to use behavioral science to test the Phillips Curve thesis. A simplified company was used as a model, where labor demand was related to investments. Our experiments have shown that inflation reduces unemployment in the short term, thus confirming the Phillips hypothesis. This would mean that the central banks are able to counteract unemployment through an inflationary, expansive monetary policy and generate growth in the short term, but there are strong distributional effects.