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Does the financial market believe in the Phillips Curve? Evidence from the G7 countries

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  • Fendel, Ralf
  • Lis, Eliza M.
  • Rülke, Jan-Christoph

Abstract

This paper uses monthly survey data for the G7 countries for the time period 1989 - 2007 to explore the link between expectations on nominal wages, prices and unemployment rate as suggested by the traditional and Samuelson-and-Solow-type Phillips curve. Three major findings stand out: First, we find that survey participants trust in the original as well as the Samuelson-and-Solow-type Phillips curve relationship. Second, we find evidence in favor of nonlinearities in the expected Samuelson-and-Solow-type Phillips curve. Third, when we take into account a kink in the expected Phillips curve indicating that the slope of the Phillips curve differs during the business cycle, we find strong evidence of this feature in the data which confirms recent the- oretical discussions in the literature that the Phillips curve is flatter in case of an economic downturn.

Suggested Citation

  • Fendel, Ralf & Lis, Eliza M. & Rülke, Jan-Christoph, 2008. "Does the financial market believe in the Phillips Curve? Evidence from the G7 countries," University of Göttingen Working Papers in Economics 73, University of Goettingen, Department of Economics.
    • Handle: RePEc:zbw:cegedp:73
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    References listed on IDEAS

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    3. A. W. Phillips, 1958. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957," Economica, London School of Economics and Political Science, vol. 25(100), pages 283-299, November.
    4. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
    5. Jane Ihrig & Jaime Marquez, 2004. "An Empirical Analysis of Inflation in OECD Countries," International Finance, Wiley Blackwell, vol. 7(1), pages 61-84, March.
    6. Laurence Boone & Claude Giorno & Mara Meacci & David Rae & Pete Richardson & Dave Turner, 2003. "Estimating the structural rate of unemployment for the OECD countries," OECD Economic Studies, OECD Publishing, vol. 2001(2), pages 171-216.
    7. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
    8. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Lo scopo inconfessato della riforma del mercato del lavoro
      by Alberto Bagnai in Goofynomics on 2012-04-12 17:24:00
    2. The unconfessed goal of Italian labour market reform
      by Alberto Bagnai in Goofynomics on 2012-04-12 17:03:00
    3. LO SCOPO INCOFESSATO DELLA RIFORMA DEL LAVORO
      by free-italia in Free Italia on 2012-04-13 15:30:00

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    More about this item

    Keywords

    Phillips curve; Forecasting; Panel data model;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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