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Inflation-Unemployment Tradeoff and Regional Labor Market Data

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  • Hassler, Uwe
  • Neugart, Michael

Abstract

We estimate a linear and a piecewise linear Phillips curve model with regional labor market data for West German and Neue Länder. Employing regional observations allows us to country difference the data. This eliminates, under the assumption of homogeneous Länder, supply shocks and changes in the formation of expectations as possible identification failures. With seemingly unrelated regressions we find a flat Phillips curve in the Neue Länder. For the West German Länder a piecewise linear model with a higher inflation-unemployment tradeoff for the regime of low unemployment rates fits the data very well. The results hold true if we control for endogeneity of the unemployment rate. With a kinked but upward sloping aggregate supply curve there seems to be room for stabilization policies, at least in the range of aggregate demand shifts that our data covers.

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Bibliographic Info

Paper provided by Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) in its series Darmstadt Discussion Papers in Economics with number 37697.

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Date of creation: Sep 2002
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Publication status: Published in Darmstadt Discussion Papers in Economics . 112 (2002-09)
Handle: RePEc:dar:ddpeco:37697

Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/37697/
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Related research

Keywords: inflation-unemployment tradeoff; NAIRU; regional labor market data; seemingly unrelated regression;

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References

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  1. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
  2. N. Gregory Mankiw, 2000. "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," NBER Working Papers 7884, National Bureau of Economic Research, Inc.
  3. Schwert, G William, 2002. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 5-17, January.
  4. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  5. John DiNardo & Mark P. Moore, 1999. "The Phillips Curve is Back? Using Panel Data to Analyze the Relationship Between Unemployment and Inflation in an Open Economy," NBER Working Papers 7328, National Bureau of Economic Research, Inc.
  6. Wolfgang Franz, 2001. "Neues von der NAIRU?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 221(3), pages 256-284.
  7. Banerjee, Anindya, 1999. " Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 607-29, Special I.
  8. George A. Akerlof & William T. Dickens & George L. Perry, 2000. "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 1-60.
  9. Breusch, T.S. & Pagan, A.R., . "The Lagrange multiplier test and its applications to model specification in econometrics," CORE Discussion Papers RP -412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Cited by:
  1. Linzert, Tobias, 2005. "The Unemployment Inflation Trade-Off in the Euro Area," IZA Discussion Papers 1699, Institute for the Study of Labor (IZA).

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