NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

AIL Theory and the Ailing Phillips Curve: A Contract Based Approach to Aggregate Supply

Roger E.A. Farmer

NBER Working Paper No. 3115
Issued in September 1989
NBER Program(s):   ME

This paper presents empirical evidence from U.S. data of a structurally stable aggregate supply relationship between real and nominal rates of interest and the rate of unemployment. The paper reviews theories of contracts that are based on the twin assumptions of asymmetric information and limited collateral and it argues that these theories (referred to as A.I.L. theories) provide a strong theoretical foundation for a contract-based theory of aggregate supply. It is suggested that the original Phillips curve estimates should be reinterpreted in the light of A.I.L. theories which represent alternatives to the Phelps-Friedman interpretation of the Phillips relationship.

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Document Object Identifier (DOI): 10.3386/w3115

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