Microeconomic Foundations of the Phillips Relationship

Suppose that, having developed a certain macroeconomic relationship, we were then to try it out against possible rivals, using econometric criteria of the type applied throughout the two preceding chapters as sorting-out devices. Suppose further that our relationship proved to be an excellent performer, in econometric terms, for many different economies and for many different periods of time. Finally, let us say that, having deduced the testable implications of the relationship (or of some wider system of relationships of which it formed a part) we found that it performed well under test, again for different economies and different periods of time. Would we then know all that we needed to know about the relationship and be justified in saying that further research was unnecessary? The answer is ‘No’ because as well as knowing that a macro relationship exists we need to know why it exists, that is what are the more basic, less aggregative relationships which combine to produce it. An investigation of this latter question typically involves an analysis in terms of individual decision-making units — households and firms — and for this reason is often described as an investigation of the microeconomic foundations of the macro relationship in question. Using this terminology, then, we can sum up the position by saying that we need to know something about the microeconomic foundations of a macro relationship before we can be satisfied that there is nothing of importance still to be learned about the relationship.