Advanced Search
MyIDEAS: Login to save this paper or follow this series

Wage and Price Phillips Curves An empirical analysis of destabilizing wage-price spirals

Contents:

Author Info

  • Peter Flaschel

    ()
    (University of Bielefeld, Germany)

  • Hans-Martin Krolzig

    ()
    (Department of Economics, and Nuffield College, Oxford University)

Abstract

In this paper we introduce a small Keynesian model of economic growth which is centered around two advanced types of Phillips curves, one for money wages and one for prices, both being augmented by perfect myopic foresight and supplemented by a measure of the medium-term inflationary climate updated in an adaptive fashion. The model contains two potentially destabilizing feedback chains, the so-called Mundell and Rose-effects. We estimate parsimonious and congruent Phillips curves for money wages and prices in the US over the past five decades. Using the parameters of the empirical Phillips curves, we show that the growth path of the private sector of the model economy is likely to be surrounded by centrifugal forces. Convergence to this growth path can be generated in two ways: a Blanchard-Katz-type error-correction mechanism in the money-wage Phillips curve or a modified Taylor rule that is augmented by a term, which transmits increases in the wage share (real unit labor costs) to increases in the nominal rate of interest. Thus the model is characterized by local instability of the wage-price spiral, which however can be tamed by appropriate wage or monetary policies. Our empirical analysis finds the error-correction mechanism being ineffective in both Phillips curves suggesting that the stability of the post-war US macroeconomy originates from the stabilizing role of monetary policy.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nuff.ox.ac.uk/economics/papers/2003/W16/PFHMK3a.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2003-W16.

as in new window
Length: 32 pages
Date of creation: 01 Jan 2003
Date of revision:
Handle: RePEc:nuf:econwp:0316

Contact details of provider:
Web page: http://www.nuff.ox.ac.uk/economics/

Related research

Keywords: Phillips curves; Mundell effect; Rose effect; Monetary policy; Taylor Rule; Inflation; Unemployment; Instability;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
  2. Ray C. Fair, 2000. "Testing the NAIRU Model for the United States," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 64-71, February.
  3. Galí, Jordi & Gertler, Mark & López-Salido, J David, 2001. "European Inflation Dynamics," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2684, C.E.P.R. Discussion Papers.
  4. Chiarella,Carl & Flaschel,Peter, 2000. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521643511.
  5. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(4), pages 1295-1328, November.
  6. PLASMANS, Joseph & MEERSMAN, Hilde & VAN POECK, André & MERLEVEDE, Bruno, 2002. "The unemployment benefit system and wage flexibility in EMU: time-varying evidence in five countries," Working Papers 2002020, University of Antwerp, Faculty of Applied Economics.
  7. John B. Taylor, 1998. "Staggered Price and Wage Setting in Macroeconomics," NBER Working Papers 6754, National Bureau of Economic Research, Inc.
  8. N. Gregory Mankiw, 2000. "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1905, Harvard - Institute of Economic Research.
  9. Laxton, Douglas & Rose, David & Tambakis, Demosthenes, 1999. "The U.S. Phillips curve: The case for asymmetry," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 23(9-10), pages 1459-1485, September.
  10. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2139, C.E.P.R. Discussion Papers.
  11. Christian Groth, 1993. "Some unfamiliar dynamics of a familiar macro model a note," Journal of Economics, Springer, Springer, vol. 58(3), pages 293-305, October.
  12. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-01, C.V. Starr Center for Applied Economics, New York University.
  13. David Romer, 2000. "Keynesian Macroeconomics without the LM Curve," NBER Working Papers 7461, National Bureau of Economic Research, Inc.
  14. William Poole, 1999. "Monetary policy rules?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Mar, pages 3-12.
  15. James Tobin, 1993. "Price Flexibility and Output Stability: An Old Keynesian View," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 7(1), pages 45-65, Winter.
  16. Olivier Jean Blanchard & Lawrence Katz, 1999. "Wage Dynamics: Reconciling Theory and Evidence," NBER Working Papers 6924, National Bureau of Economic Research, Inc.
  17. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1492, C.E.P.R. Discussion Papers.
  18. Laurence Ball & Robert Moffitt, 2001. "Productivity Growth and the Phillips Curve," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 450, The Johns Hopkins University,Department of Economics.
  19. Hans-Martin Krolzig, 2001. "General--to--Specific Reductions of Vector Autoregressive Processes," Computing in Economics and Finance 2001, Society for Computational Economics 164, Society for Computational Economics.
  20. Flaschel, Peter & Gong, Gang & Semmler, Willi, 2001. "A Keynesian macroeconometric framework for the analysis of monetary policy rules," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 46(1), pages 101-136, September.
  21. Plasmans, J.E.J. & Meersman, H. & Poeck, A. van & Merlevede, B., 1999. "Generosity of the Unemployment Benefit System and Wage Flexibility in EMU: Time-Varying Evidence in Five Countries," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-81573, Tilburg University.
  22. repec:nbr:nberre:0126 is not listed on IDEAS
  23. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  24. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Toichiro Asada & Pu Chen & Carl Chiarella & Peter Flaschel, 2004. "Keynesian Dynamics and the Wage-Price Spiral: A Baseline Disequilibrium Model," Working Paper Series, Finance Discipline Group, UTS Business School, University of Technology, Sydney 139, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  2. C. Chiarella & P. Chen, 2004. "Keynesian Dynamics and the Wage-Price Spiral:Estimating a Baseline Disequilibrium Approach," Computing in Economics and Finance 2004, Society for Computational Economics 149, Society for Computational Economics.
  3. Peter Skott & Peter Flaschel, 2004. "Steindlian Models of Growth and Stagnation," UMASS Amherst Economics Working Papers, University of Massachusetts Amherst, Department of Economics 2004-11, University of Massachusetts Amherst, Department of Economics.
  4. Carl Chiarella & Peter Flaschel & Peiyuan Zhu, 2003. "The Structure of Keynesian Macrodynamics: A Framework for Future Research," Working Paper Series, Finance Discipline Group, UTS Business School, University of Technology, Sydney 129, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  5. T. Asada & P. Chen, 2004. "Keynesian Dynamics and the wage price spiral. A baseline disequilibrium approach," Computing in Economics and Finance 2004, Society for Computational Economics 262, Society for Computational Economics.
  6. Toichiro Asada & Peter Flaschel & Peter Skott, 2005. "Prosperity and Stagnation in Capitalist Economies," UMASS Amherst Economics Working Papers, University of Massachusetts Amherst, Department of Economics 2005-12, University of Massachusetts Amherst, Department of Economics.
  7. Pu Chen & Carl Chiarella & Peter Flaschel & Willi Semmler, 2006. "Keynesian Macrodynamics and the Phillips Curve. An Estimated Baseline Macromodel for the U.S. Economy," Working Paper Series, Finance Discipline Group, UTS Business School, University of Technology, Sydney 147, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  8. Toichiro Asada & Carl Chiarella & Peter Flaschel, 2003. "Keynes-Metzler-Goodwin Model Building: The Closed Economy," Working Paper Series, Finance Discipline Group, UTS Business School, University of Technology, Sydney 124, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  9. Carl Chiarella & Peter Flaschel & Hing Hung, 2006. "Interacting Business Cycle Fluctuations: A Two-Country Model," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., World Scientific Publishing Co. Pte. Ltd., vol. 51(03), pages 365-394.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nuf:econwp:0316. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maxine Collett).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.