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The price-price Phillips curve in small open economies and monetary unions

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  • Andrea Vaona

    ()
    (Department of Economics (University of Verona))

Abstract

This paper extends the efficiency wages / partially adaptive expectations Phillips curve, otherwise known as price-price Phillips curve, from a closed economy context to an open economy one with both commodity trade and capital mobility. We also consider the case of a monetary union (a country) with two member states (regions). Opening the trade account alters the slope of the Phillips curve in an ambiguous way and it makes its position a function of the change of foreign output too. Opening the capital account, after opening the trade one, does not affect the Phillips curve. Within a monetary union, the link between the size of a region and its weight in the Phillips curve has an a priori ambiguous sign. Once resorting to plausible numerical simulations, economic openness reduces the sacrifice ratio. Regarding a monetary union, aggregate inflation is more affected by regional unemployment dynamics the greater is the weight of the region in aggregate unemployment rate and output.

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Bibliographic Info

Paper provided by University of Verona, Department of Economics in its series Working Papers with number 06/2011.

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Length: 14
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:ver:wpaper:06/2011

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Keywords: efficiency wages; unemployment; Phillips curve; inflation; adaptive expectations;

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