Surreal illustration of the Phillips Curve as a winding road leading to a divine economic city.

Decoding the Phillips Curve: How Beveridgean Economics Changes Everything

Nico Varela in Business & Economy August 2025 • 4 min read.

"Move over traditional models, a new approach linking unemployment and inflation is here, and it's got some surprising insights for today's economy."

For decades, the Phillips curve has been a cornerstone of macroeconomic theory, illustrating the inverse relationship between inflation and unemployment. The traditional view suggests that as unemployment falls, inflation rises, and vice versa. However, recent economic events, particularly the post-pandemic period, have challenged this conventional wisdom, leading economists to question the curve's reliability.

A groundbreaking paper proposes a new perspective: the Beveridgean Phillips curve. This model, rooted in the principles of directed-search pricing, offers a fresh lens through which to understand the dynamics of inflation and unemployment. It addresses some of the shortcomings of traditional New Keynesian models, providing compelling explanations for recent economic phenomena.

The Beveridgean Phillips curve introduces novel concepts such as directed-search pricing, where prices respond to market slack rather than marginal costs. This approach leads to the 'divine coincidence,' where inflation aligns with its target rate when unemployment is at its efficient level. As we navigate an ever-changing economic landscape, the Beveridgean Phillips curve provides valuable insights for policymakers and anyone keen to understand the forces shaping our financial future.

What Makes the Beveridgean Phillips Curve Different?

Surreal illustration of the Phillips Curve as a winding road leading to a divine economic city.

Unlike traditional New Keynesian models that rely on monopolistic pricing and price-adjustment costs, the Beveridgean Phillips curve is built on directed-search pricing. In simpler terms, this means that businesses set prices based on the overall slack in the economy rather than just their own costs. This approach has significant implications for how we understand the relationship between inflation and unemployment.

Here's a breakdown of the key properties of the Beveridgean Phillips curve:

The Divine Coincidence: Guarantees that inflation is on target when unemployment is efficient.
Curve Stability: The Phillips curve shifts depending on whether it is formulated with inflation, unemployment, and labor-market tightness.
The Kink: The Phillips curve displays a kink at the point of divine coincidence, especially if wage decreases are more costly to producers than price increases.

These properties allow the Beveridgean Phillips curve to better align with recent U.S. economic data, capturing nuances that traditional models often miss. This new perspective offers a more accurate and robust framework for understanding the economy.

Why This Matters for You

The Beveridgean Phillips curve offers more than just theoretical insights. It has practical implications for understanding recent economic events and shaping future policies. As economies grapple with the complexities of inflation and unemployment, this model offers a valuable tool for policymakers and analysts alike, paving the way for a more nuanced and effective approach to economic management. Whether you're an economist, a policymaker, or simply someone interested in understanding how the economy works, the Beveridgean Phillips curve provides a compelling new perspective on the forces shaping our financial world.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2401.12475,

Title: Beveridgean Phillips Curve

Subject: econ.th

Authors: Pascal Michaillat, Emmanuel Saez

Published: 22-01-2024

Everything You Need To Know

What is the main idea behind the Phillips Curve, and why has its reliability been questioned recently?

The Phillips curve traditionally illustrates an inverse relationship between inflation and unemployment: as unemployment falls, inflation rises, and vice versa. However, recent economic events, particularly following the pandemic, have challenged this conventional wisdom, causing economists to doubt its reliability. A potential explanation to this imperfect relationship is offered by the Beveridgean Phillips curve.

How does the Beveridgean Phillips curve differ from traditional New Keynesian models in explaining the relationship between unemployment and inflation?

Unlike traditional New Keynesian models that rely on monopolistic pricing and price-adjustment costs, the Beveridgean Phillips curve is built on directed-search pricing. This means businesses set prices based on the overall slack in the economy rather than just their own costs. The model incorporates the 'divine coincidence' where inflation aligns with its target rate when unemployment is at its efficient level.

Can you explain the concept of 'directed-search pricing' within the context of the Beveridgean Phillips curve?

Directed-search pricing, in the context of the Beveridgean Phillips curve, refers to how businesses set prices based on the overall slack in the economy rather than just their individual costs. It is an alternative to traditional views of how prices are formed, where prices respond to market slack. This approach challenges traditional New Keynesian models that rely on monopolistic pricing and price-adjustment costs.

What are the key properties of the Beveridgean Phillips curve, and how do they contribute to a better understanding of the economy?

The key properties of the Beveridgean Phillips curve include 'The Divine Coincidence,' which guarantees that inflation is on target when unemployment is efficient. The Phillips curve shifts depending on whether it is formulated with inflation, unemployment, and labor-market tightness. There is also 'The Kink', which is a kink in the Phillips curve that displays a kink at the point of divine coincidence, especially if wage decreases are more costly to producers than price increases. These properties align the Beveridgean Phillips curve better with recent U.S. economic data, capturing nuances that traditional models often miss, thus offering a more accurate and robust framework for understanding the economy.

Why is the Beveridgean Phillips curve considered valuable for policymakers, and what implications does it have for managing inflation and unemployment?

The Beveridgean Phillips curve offers practical insights for understanding economic events and shaping future policies. For example, the 'divine coincidence' property, where inflation aligns with its target rate when unemployment is at its efficient level, allows policymakers to evaluate economic output relative to labor market tightness. Its framework is a valuable tool for policymakers and analysts for a more nuanced and effective approach to economic management. The model's consideration of labor-market tightness in the Beveridgean Phillips curve also allows a broader insight than inflation and unemployment alone.