1. Introduction
Tile fact that nominal prices and wages tend to rise more rapidly at tile peak of the business cycle than they do in the trough has been well recognized from the time when tile cycle was first perceived as a distinct phenomenon. The inference that perinanent inflation will therefore induce a permanent economic high is no doubt equally ancient, yet it is only recently that tltis notion lms undergone the mysterious transformation from obvious fallacy to cornerstone of the theory of economic policy.
This transformation did not arise from new developments in economic theory. On the contrary, as soon as Pbelps and others made the first serious attempts to rationalize the apparent trade-off in modern tlteoretical terms, the zero-degree homogeneity of delnand and supply functions was re-discovered in tltis new context (as Friedman predicted it would be) and re-named the "natural rate hypothesis".1 It arose, instead, from the younger tradition of the econometric forecasting models, and from the commitment on the part of a large fraction of economists to the use of these models for quantitative policy evaluation. Titese models have implied the existence of long-run unemployment-inflation trade-offs ever since the "wage-price sectors" were first incorporated and they promise to do so in the future although the "terms" of the trade-off continue to shift. 2