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Real wages, real interest rates, and the Phillips curve

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Author Info
Paul F. Gentle
Krishna P. Paudel
Kamal P. Upadhyaya

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Abstract

This article argues that any analysis of a Phillips curve should include the real interest rate in addition to inflation and real wages as any changes in the interest rate changes the labour-capital input mix in the production process leading to a change in the level of employment in the economy. To justify this argument a Phillips curve model is developed, which includes the real interest rate in addition to inflation and real wages. After the diagnosis of the time series properties of the data, an error correction model is developed and estimated using a set of US annual data from 1948 to 1996. The estimated parameters of the model do suggest that one should really take into consideration of the real interest rate while analysing the Phillips curve. A non-nested test (F-test) also suggests that the Phillips curve model with real interest rate as an additional variable performs better than the conventional method that does not include the real interest rate.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 37 (2005)
Issue (Month): 4 (March)
Pages: 397-402
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Handle: RePEc:taf:applec:v:37:y:2005:i:4:p:397-402

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References listed on IDEAS
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  1. Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche 8633, Universite de Montreal, Departement de sciences economiques.
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  2. Matthew D. Shapiro, 1987. "Supply Shocks in Macroeconomics," Cowles Foundation Discussion Papers 821, Cowles Foundation, Yale University. [Downloadable!]
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  3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  4. James MacKinnon, 1990. "Critical Values for Cointegration Tests," University of California at San Diego, Economics Working Paper Series 90-4, Department of Economics, UC San Diego. [Downloadable!]
  5. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September. [Downloadable!] (restricted)
  6. Prachowny, Martin F. J., 1991. "What is the speed limit along the U.S. Phillips curve?," Journal of Macroeconomics, Elsevier, vol. 13(3), pages 417-434. [Downloadable!] (restricted)
  7. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers 740R, Cowles Foundation, Yale University, revised Feb 1986. [Downloadable!]
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  8. Perry, George L, 1986. "Shifting Wage Norms and Their Implications," American Economic Review, American Economic Association, vol. 76(2), pages 245-48, May. [Downloadable!] (restricted)
  9. Ray C. Fair, 1999. "Does the NAIRU Have the Right Dynamics?," American Economic Review, American Economic Association, vol. 89(2), pages 58-62, May. [Downloadable!] (restricted)
  10. Hoover, Kevin D, 1984. "Two Types of Monetarism," Journal of Economic Literature, American Economic Association, vol. 22(1), pages 58-76, March. [Downloadable!] (restricted)
  11. Blinder, Alan S, 1987. "Keynes, Lucas, and Scientific Progress," American Economic Review, American Economic Association, vol. 77(2), pages 130-36, May. [Downloadable!] (restricted)
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