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

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  • Hans-Martin Krolzig
  • Peter Flaschel

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.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2003-W16.

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Date of creation: 01 Jan 2003
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Handle: RePEc:oxf:wpaper:2003-w16

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

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  1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 115(1), pages 147-180, February.
  2. 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.
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Citations

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Cited by:
  1. Asada, Toichiro & Chen, Pu & Chiarella, Carl & Flaschel, Peter, 2006. "Keynesian dynamics and the wage-price spiral: A baseline disequilibrium model," Journal of Macroeconomics, Elsevier, Elsevier, vol. 28(1), pages 90-130, March.
  2. 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.
  3. Toichiro Asada & Pu Chen & Carl Chiarella & Peter Flaschel, 2004. "Keynesian Dynamics and the Wage Price Spiral. A Baseline Disequilibrium Approach," Macroeconomics, EconWPA 0409001, EconWPA.
  4. 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.
  5. 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., vol. 51(03), pages 365-394.
  6. 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.
  7. Peter Flaschel & Peter Skott, 2006. "Steindlian Models Of Growth And Stagnation," Metroeconomica, Wiley Blackwell, Wiley Blackwell, vol. 57(3), pages 303-338, 07.
  8. 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.
  9. 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.

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