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How do Beveridge and Phillips curves in the euro area behave under the stress of the world economic crisis?

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  • Sell, Friedrich L.
  • Reinisch, David C.
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    Abstract

    In this paper, the authors present a new concept of the 'modified output gap' based on the New Keynesian Phillips curve and on the Beveridge curve. In the first part of the paper, both mentioned curves are derived analytically. In doing so, we identify key parameters for the shift of the Beveridge curve (up- or downwards) and prove that - fulfilling a minimum of assumptions - the New Keynesian Phillips curve is (also) a falling convex relationship between the inflation rate and the unemployment rate in the tradition of Phillips (1958). Inserting the Phillips curve into the Beveridge curve reveals the explicit positive relationship between the vacancy ratio and the inflation rate. In the second part of the paper, we put all three relationships under an empirical 'stress test' using panel data from eleven of the EA 12 countries for three different samples during the world economic crisis: In all cases, the parameter estimates confirm the presumed existence of the three functions. --

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    Bibliographic Info

    Paper provided by Universität der Bundeswehr München, Economic Research Group in its series Working Papers in Economics with number 2013,1.

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    Date of creation: 2013
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    Handle: RePEc:zbw:ubwwpe:20131

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    Keywords: labor market; Phillips and Beveridge curves; policy ineffectiveness; world economic crisis and output gap;

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    1. Howard J. Wall & Gylfi Zoega, 2001. "The British Beveridge curve: a tale of ten regions," Working Papers 2001-007, Federal Reserve Bank of St. Louis.
    2. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Publishing.
    3. Ken Kuttner & Tim Robinson, 2008. "Understanding the Flattening Phillips Curve," RBA Research Discussion Papers rdp2008-05, Reserve Bank of Australia.
    4. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Borsch-Supan, Axel H, 1991. "Panel Data Analysis of the Beveridge Curve: Is There a Macroeconomic Relation between the Rate of Unemployment and the Vacancy Rate?," Economica, London School of Economics and Political Science, vol. 58(231), pages 279-97, August.
    6. Scheufele, Rolf, 2010. "Evaluating the German (New Keynesian) Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 145-164, August.
    7. DiNardo, J. & Moore, M.P., 1999. "The Phillips Curve is Back? Using Panel Data to Analyze the Relationship Between Unemployment and Inflation in an Open Economy," Papers 99-00-04, California Irvine - School of Social Sciences.
    8. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, December.
    9. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, December.
    10. Anthony De Francesco, 1999. "The relationship between unemployment and vacancies in Australia," Applied Economics, Taylor & Francis Journals, vol. 31(5), pages 641-652.
    11. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    12. Warren, Ronald S, Jr, 1983. "Labor Market Contacts, Unanticipated Wages, and Employment Growth," American Economic Review, American Economic Association, vol. 73(3), pages 389-97, June.
    13. Zheng Liu & Glenn Rudebusch, 2010. "Inflation: mind the gap," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan19.
    14. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    15. Kevin L. Kliesen, 2010. "Inflation may be the next dragon to slay," The Regional Economist, Federal Reserve Bank of St. Louis, issue Jan, pages 4-9.
    16. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
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