Hysteresis and Instability in the Natural Rate of Unemployment

In this paper, it is pointed out that the long-run Phillips curve genus contains upward and downward sloping species as well as the vertical species. Tw o models are used: in one the rate of inflation helps determine the natural rate of unemployment, as proposed by Milton Friedman; in the other the process of mo ving from one inflation rate to another helps shape thenatural rate, according to the hysteresis effect proposed by Edmond Phelps. In both cases the resulting models are unstable, implying that a vertical long-run Phillips curve will not b e regained if disturbed.