What Happened to the Phillips Curve in the 1990s in Canada?

There are at least two broad categories of interpretation to consider when examining observations on a country’s output-inflation relationship (a country’s Phillips curve). On the one hand is the traditional interpretation, which emphasizes how such a relationship mainly reflects a country’s wageand price-setting institutions. In this case, the Phillips curve is viewed primarily as a structural object, in the sense that its slope is governed foremost by the institutional aspects of the wage-setting mechanism—and hence is an object that constrains monetary policy. On the other hand is the view that the Phillips curve is essentially a reduced-form relationship, which mainly reflects rather than constrains the behaviour of monetary authorities. We will argue that this second view helps explain recently observed changes in the Phillips curve.