Rebutting the rebuttal: On inflation, unemployment, and the Phillips curve

My article, "The interim has failed to curb inflation and unemployment," was published in The Daily Star on Dec 29, 2025. Dr Abdullah A Dewan has delivered a rebuttal to my writing, published on January 4, 2026. While Dr Dewan's theoretical belief is his own choice, his misinterpretation of my writing warrants my response. The rebuttal centres on the theory of the Phillips curve, which includes a typical trade-off between unemployment and inflation, suggesting that the task of lowering unemployment raises inflation and vice versa. The rebuttal says that I criticised the interim government for not being able to control both inflation and unemployment. And to make it happen, I advocated the application of the Phillips curve as the only mantra of salvation.

As Dr Dewan writes, my article "evaluates the interim government's economic performance primarily through the conventional inflation-unemployment trade-off, concluding that policy failure explains the persistence of both." He adds that my argument's analytical assumptions do not hold anymore, and that it also omits critical institutional realities. Although I started with the notion of the Phillips curve, suggesting that the central bank raised the policy rate to 10 percent to bring inflation down, I pointed out that this high interest rate is actually augmenting unemployment by discouraging private credit, whose growth has come down to six percent. Disappointingly, inflation is not coming down as designed. Then, I concluded that Bangladesh's current situation of high inflation and rising unemployment heralds the advent of stagflation—when the typical Phillips curve disappears.

The intent of Dr Dewan's rebuttal is unclear. First, he argued that my allusion to the unemployment-inflation trade-off as nested in the typical Phillips curve is a bad attempt to mislead the reader. Second, he attempted to justify the presence of both high inflation and rising unemployment during the interim administration, whose main job, in his language, was to arrest deterioration after inheriting a crisis-prone economy. Despite my disagreement, I don't see any problem with his second stance, where he finds the interim's achievement a success, without presenting credible evidence or numbers. However, I don't see any reason to slaughter the Phillips curve theory only for the sake of crediting the interim.

There is a plethora of research on whether the unemployment-inflation trade-off is active or not in peer-reviewed journals. Economists as a whole body of scholars didn't declare the demise of the Phillips curve, although Dr Dewan almost unilaterally sent the theory to the coffin by branding it an old, "obsolete" tool of the mid-20th century. I personally authored and co-authored papers in research journals on the existence of the Phillips curve, even in developing countries like Bangladesh and India.

In 1958, economist AW Phillips from the London School of Economics found a negative relationship between unemployment and wages after working on almost one hundred years' data from the UK. He himself didn't claim it as a theory. In the 1960s, Paul Samuelson and Robert Solow, two Nobel laureates, worked with American data and found the trade-off authentic. They first coined the term Phillips curve, which later drew enormous attention in economic policymaking. Even the Nobel laureate monetarist Milton Friedman made a powerful reconciliation of the theory by saying that although there is no permanent trade-off, there is always a temporary trade-off between inflation and unemployment. Robert Lucas and Edmund Phelps, two Nobel laureates, theorised the role of expectations, which are also pertinent to the model of the expectations-augmented Phillips curve or the New Keynesian Phillips curve.

The disappearance of the Phillips curve in the stagflation of the 1970s was due to the role of expectations and supply shocks, such as the fuel-price hikes. Thus, the Phillips curve is like a mountain, which may occasionally disappear from our typical eyesight due to clouds or dense fog. That is why George Akerlof, another Nobel laureate, commented, "Probably the single most important macroeconomic relationship is the Phillips curve."

Dr Dewan discards the Phillips curve as an old-style, mid-20th-century instrument. He seems to be unaware of the latest developments that fortified the curve's relevance in modern economics. The Harvard economist Gregory Mankiw asserted that three things have rejuvenated the Phillips curve to make it a modern policy tool: i) the replacement of wage inflation with price inflation; ii) the attachment of expectations or expected inflation, and finally iii) the inclusion of supply shocks.

The reason why we don't readily see this trade-off in developing countries is attributable to expectations, supply shocks, institutional factors, and often data inaccuracies. When those factors are taken care of, the Phillips curve reappears. Sometimes, the selection of the right data series is important. For example, Nobel laureate Paul Krugman cautioned that we need to use wage inflation instead of price inflation to see the Phillips.

Dr Dewan complains that my article "omits critical institutional realities." The fourth paragraph of my article includes, "Monetary treatments, including high policy rates above 10 percent, almost failed to tame inflation because of other rogue institutional failures such as extortions, mobocracy, fiscal debility, and declining loan recovery." It appears that Dr Dewan didn't carefully go through my whole article before orchestrating a criticism of my theoretical reference to the Phillips curve.

The flipside of the Phillips curve, the Lucas supply function—which shows a positive relationship between output and inflation—has a strong micro foundation in the rising disutility of work. Thus, the Phillips curve is not just a statistical accident; it is deeply ingrained in human psychology of accepting low wages when unemployment in society is high and bargaining for higher wages when unemployment is slim. Recent research by the Federal Reserve of Chicago showed that while the Phillips curve for the US almost flattened in the pre-pandemic period, it again reemerged and steepened in the post-Covid era. Thus, despite changes in the slope of the Phillips curve, it stays there as long as human psychology preserves order and rationality. That is why the Phillips-curve trade-off theory is a tremendously powerful companion that policymakers devotedly treasure in their toolbox.

Dr Birupaksha Paulis professor of economics at the State University of New York at Cortland in the US.