The inexorable and mysterious tradeoff between inflation and unemployment

This paper discusses the short-run tradeoff between inflation and unemploym ent. Although this tradeoff remains a necessary building block of business cycle theory, economists have yet to provide a completely satisfactory expl anation for it. According to the consensus view among central bankers and m onetary economists, a contractionary monetary shock raises unemployment, at least temporarily. anti leads to a delayed and gradual fall in inflation. Standard dynamic models of price adjustment, however, cannot explain this p attern or responses. Reconciling the consensus view about the effects of mo netary policy with models of price adjustment remains an outstanding puzzle for business cycle theorists.