Fumitaka Furuoka, Asia–Europe Institute, University of Malaya

It would be impossible to imagine the field of economics without macroeconomics. Macroeconomics together with microeconomics are the main pillars of the economic sciences. A sentiment that economics without macroeconomics is like a family without a father can be shared among those who studied economics before the time when the theoretical framework of macroeconomics got severely criticized due to a supposed lack of a “micro-foundations”. In the 1980s, the University of Malaya economics students learned the discipline with the help of three “must-have” books, namely, Macroeconomics by Rudiger Dornbusch and Stanley Fisher, Microeconomic Theory by James Henderson and Richard Quandt and Mathematical Economics by Alpha Chiang.

Students educated in this tradition would think that microeconomics is the most essential part of the discipline but it is also rather abstract. By contrast, macroeconomics is more concrete and practical. Needless to say, mathematical economics would be considered an indispensable intellectual tool for comprehending both micro- and macroeconomic theories. In short, macroeconomics is a subject that deals with and helps to make sense of actual economic activities done through the interactions between money, interest rate, inflation and unemployment rate. Particularly, macroeconomics taught us that the two main objectives of economic policies are preventing high inflation and keeping the unemployment rate low.

In this sense, a trade-off relationship between inflation and unemployment known as the Phillips curve occupies a special place in the theoretical foundation of macroeconomics. The macroeconomics textbooks told us that central banks have the almighty power to control the money supply which would have a direct impact on the inflation rate. In the Phillips curve framework, central banks would need to print more money by implementing expansionary monetary policy when the inflation rate is low and the unemployment rate is high. In contrast, when the inflation rate is high and the unemployment rate is low, central banks would print less money and thus implement a tight monetary policy.

After the phenomenon of the “stagflation” occurred in the 1970s, Milton Friedman issued a famous criticism of the trade-off relationship between inflation and unemployment. He stated that there is only a short-run Phillips curve; in the long-run, the relationship between inflation and unemployment would be vertical. Until recent years the argument concerning the existence of and distinction between the short-run and long-run Phillips curve has been shared among mainstream economists. The understanding was that the Phillips curve is still a useful policy tool; at least, in the short-run.

However, in the 2010s, central bankers began noticing a strange phenomenon: the slope of the Phillips curve in developed countries was transforming from “vertical” to “horizontal”. This gave rise to arguments that the increasingly “horizontal” Philipps curve signaled the disappearance of the trade-off relationship between inflation and unemployment. With the horizontal Phillips curve, low inflation and low unemployment would co-exist. In other words, an economic boom would bring the downward pressure on the unemployment rate without putting the upward pressure on inflation. If this indeed is the case, then there would be no linkage between the two main macroeconomic variables―inflation and unemployment. And this would bring the end of macroeconomics as we know it.

Or, perhaps, new macroeconomic theories could be constructed from scratch?

Figure 1: Disappearance of the Phillips curve in ASEAN

So, a pertinent question could be: is the Phillips curve disappearing in ASEAN as well? This was the guiding question when, in May 2019, our research team began a research project funded by the Tun Ismail Ali Chair (TIAC). While implementing the project, we collected data on unemployment and inflation in five ASEAN countries―Indonesia, Malaysia, the Philippines, Singapore and Thailand. We then tested a hypothesis whether the Phillips curve does indeed disappear in these countries.

As shown in Figure 1, the findings indicated that the slope of the Phillips curve in the five ASEAN countries has declined. In other words, the Phillips curve does seem to disappear in the region. A good news is that central banks in the region may want to implement bold expansionary policies without worrying about the ensuing high inflation rates. However, the catch is that some ASEAN countries might face the problem of severe deflation in the future. For a more detailed discussion, please refer to our paper (Furuoka et al., 2020).


Furuoka, F., Pui, K.L., Chomar, M.T.  & Nikitina, L. (2020). Is the Phillips curve disappearing? Evidence from a new test procedure. Applied Economics Letters. https://doi.org/10.1080/13504851.2020.1761528    

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