In an inflation-augmented Phillips curve, the rate of inflation P depends on the unemployment rate U and the anticipated rate of inflation A, which in turn depends on the rate of inflation the previous period:

where β₁, β₂, and β₃ are positive parameters. If the unemployment rate is constant, what must be true of β₁, β₂, and β₃ for inflation to converge to an equilibrium value?
If the model is stable, is it monotonically stable or cyclically stable?

Transcribed Image Text:

P = BU,+BA, A = + 3Pt-1