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Instability and nonlinearity in the Euro area Phillips curve

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Author Info
Alberto Musso () (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.)
Livio Stracca () (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.)
Dick van Dijk () (Econometric Institute, Erasmus University Rotterdam, P.O. Box 1738, NL-3000 DR Rotterdam, The Netherlands.)

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Abstract

This paper provides a comprehensive analysis of the functional form of the euro area Phillips curve over the past three decades. In particular, compared to previous literature we analyse the stability of the relationship in detail, especially as regards the possibility of a time-varying mean of inflation. Moreover, we conduct a sensitivity analysis across different measures of economic slack. Our main findings are two. First, there is strong evidence of time variation in the mean and slope of the Phillips curve occurring in the early to mid 1980s, but not in inflation persistence once the mean shift is allowed for. As a result of the structural change, the Phillips curve became flatter around a lower mean of inflation. Second, we find no significant evidence of non-linearity, in particular in relation to the output gap. JEL Classification: E52, E58.

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Paper provided by European Central Bank in its series Working Paper Series with number 811.

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Length: 40 pages
Date of creation: Sep 2007
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Handle: RePEc:ecb:ecbwps:20070811

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Related research
Keywords: Inflation; output gap; structural change; asymmetry; smooth transition model.;

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dino Martellato, 2008. "Economic Integration and Macroeconomic Convergence in the Euro Area," Working Papers 2008_34, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
  2. Pierre Perron & Yohei Yamamoto, 2008. "On the Usefulness or Lack Thereof of Optimality Criteria for Structural Change Tests," Boston University - Department of Economics - Working Papers Series wp2008-006, Boston University - Department of Economics. [Downloadable!]
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