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Some Explorations, Using Canadian Data, of the S-Variable in Akerlof, Dickens, and Perry (1996)

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Author Info
Seamus, Hogan
Pichette, Lise

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Abstract

A number of authors have suggested that economies face a long-run inflation-unemployment trade-off due to downward nominal-wage rigidity. This theory has implications for the nature of the short-run Phillips curve when wage inflation is low. Akerlof, Dickens and Perry have developed an empirical model in which a variable (S) designed to capture the effect of downward nominal-wage rigidity is constructed as part of the estimation of the short-run Phillips curve. Adding this variable dramatically improves the dynamic out-of-sample inflation forecasts of the curve in both the United States and Canada. In this paper we perform a variety of tests using both real and constructed data to address whether the addition of S truly does provide a better estimate of the short-run Phillips curve, and whether this constitutes evidence that downward nominal-wage rigidity increases the natural rate of unemployment in times of low wage inflation. Our main conclusion is that the performance of the S-enhanced Phillips curve in dynamic simulations is independent of whether downward nominal-wage rigidity is an important feature of the macroeconomy.

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Paper provided by Bank of Canada in its series Working Papers with number 00-6.

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Length: 39 pages
Date of creation: 2000
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Handle: RePEc:bca:bocawp:00-6

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Related research
Keywords: Monetary policy framework; Transmission of monetary policy;

Find related papers by JEL classification:
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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