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Sources and Channels of Nonlinearities and Instabilities of the Phillips Curve: Results for the Euro Area and Its Member States

Author

Listed:
  • Reichold, Karsten

    (Department of Statistics, TU Dortmund University and Department of Economics, University of Klagenfurt)

  • Wagner, Martin

    (Department of Economics, University of Klagenfurt, Bank of Slovenia, Ljubljana and Institute for Advanced Studies, Vienna)

  • Damjanovic, Milan

    (Bank of Slovenia, Ljubljana)

  • Drenkovska, Marija

    (Bank of Slovenia, Ljubljana)

Abstract

This paper presents evidence for sources and channels of nonlinearities and instabilities of the new Keynesian Phillips curve (NKPC) for the euro area and all but four member states over the last two decades prior to the COVID-19 crisis. The approach rests upon misspecification testing using auxiliary regressions based on the standard open-economy hybrid NKPC. Using a large number of specifications, this approach allows to systematically, i. e., based on a literature review, disentangle the evidence for nonlinearities and instabilities of the NKPC according to sources and channels. For the euro area and most considered member states, there is substantial evidence for nonlinearities and instabilities. The relatively most important channels of nonlinearities and instabilities are similar across countries, whereas the relatively most important sources differ across countries. The results strongly indicate the need for considering nonlinear NKPC relationships in empirical analyses and also point towards potentially useful nonlinear specifications.

Suggested Citation

  • Reichold, Karsten & Wagner, Martin & Damjanovic, Milan & Drenkovska, Marija, 2022. "Sources and Channels of Nonlinearities and Instabilities of the Phillips Curve: Results for the Euro Area and Its Member States," IHS Working Paper Series 40, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihswps:40
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    File URL: https://irihs.ihs.ac.at/id/eprint/6179
    File Function: First version, 2022
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    References listed on IDEAS

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    1. Gerdesmeier, Dieter & Reimers, Hans-Eggert & Roffia, Barbara, 2023. "Investigating the inflation-output-nexus for the euro area: Old questions and new results," Wismar Discussion Papers 01/2023, Hochschule Wismar, Wismar Business School.

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    More about this item

    Keywords

    Euro area; instability; new Keynesian Phillips curve; nonlinearity; specification analysis;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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