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

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  • Seamus, Hogan
  • Pichette, Lise

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:bca:bocawp:00-6

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Keywords: Monetary policy framework; Transmission of monetary policy;

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Cited by:
  1. Pierre Fortin, 2013. "The Macroeconomics of Downward Nominal Wage Rigidity : a Review of the Issues and New Evidence for Canada," Cahiers de recherche 1309, CIRPEE.

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