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Productivity Growth and the Phillips Curve: A Reassessment of the US Experience

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  • Marika Karanassou

    ()
    (Queen Mary, University of London and IZA)

  • Hector Sala

    ()
    (Universitat Aut�noma de Barcelona and IZA)

Abstract

In this paper we analyse a new Phillips curve (NPC) model and demonstrate that (i) frictional growth, i.e. the interplay of wage-staggering and money growth, generates a nonvertical NPC in the long-run, and (ii) the Phillips curve (PC) shifts with productivity growth. On this basis we estimate a dynamic system of macrolabour equations to evaluate the slope of the PC and explain the evolution of inflation and unemployment in the US from 1970 to 2006. Since our empirical methodology relies heavily on impulse response functions, it represents a synthesis of the traditional structural modelling and (structural) vector autoregressions (VARs). We find that the PC is downward-sloping with a slope of -3.58 in the long-run. Furthermore, during the stagflating 70s, the productivity slowdown contributed substantially to the increases in both unemployment and inflation, while the monetary expansion was quite ineffective and led mainly to higher inflation. Finally, the monetary expansion and productivity speedup of the roaring 90s were both responsible for the significant lowering of the unemployment rate.

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Bibliographic Info

Paper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 623.

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Date of creation: Mar 2008
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Handle: RePEc:qmw:qmwecw:wp623

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Keywords: New Phillips curve; Frictional growth; Productivity growth; Stagflating seventies; Roaring nineties; Impulse response functions;

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Cited by:
  1. Karanassou, Marika & Sala, Hector, 2009. "Labour Market Dynamics in Australia: What Drives Unemployment?," IZA Discussion Papers 3924, Institute for the Study of Labor (IZA).
  2. Karanassou, Marika & Sala, Hector, 2010. "The US inflation-unemployment trade-off revisited: New evidence for policy-making," Journal of Policy Modeling, Elsevier, vol. 32(6), pages 758-777, November.
  3. Gene Ambrocio & Tae-Seok Jang, 2009. "Productivity Shocks and the New Keynesian Phillips Curve: Evidence from US and Euro Area," Kiel Advanced Studies Working Papers 453, Kiel Institute for the World Economy.
  4. Karanassou, Marika & Sala, Hector, 2009. "The US Inflation-Unemployment Tradeoff: Methodological Issues and Further Evidence," IZA Discussion Papers 4252, Institute for the Study of Labor (IZA).

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