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Identifying the Phillips curve through shifts in volatility

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  • Kajuth, Florian

Abstract

This paper applies the method of identification through heteroskedasticity (Rigobon and Sack, 2003) to address the simultaneity problem in Phillips curve estimations as an alternative to GMM estimations or exclusion restrictions. This approach makes use of shifts in the relative volatility of shocks to unemployment and inflation to trace out the Phillips curve. Moreover it provides testable restrictions, which is preferable to existing alternatives. Our results suggest a statistically and economically significant contemporaneous trade-off between inflation and the unemployment gap for the US and the euro area, with the trade-off for the euro area being larger.

Suggested Citation

  • Kajuth, Florian, 2012. "Identifying the Phillips curve through shifts in volatility," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 975-991.
  • Handle: RePEc:eee:jmacro:v:34:y:2012:i:4:p:975-991
    DOI: 10.1016/j.jmacro.2012.08.006
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    References listed on IDEAS

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    Cited by:

    1. William Gatt, 2016. "Time variation, asymmetry and threshold effect in Malta's Phillips curve," CBM Working Papers WP/02/2016, Central Bank of Malta.
    2. Florian Kajuth, 2016. "NAIRU Estimates for Germany: New Evidence on the Inflation–Unemployment Tradeoff," German Economic Review, Verein für Socialpolitik, vol. 17(1), pages 104-125, February.
    3. Owen Grech & Noel Rapa, 2016. "STREAM: A structural macro-econometric model of the Maltese economy," CBM Working Papers WP/01/2016, Central Bank of Malta.

    More about this item

    Keywords

    Phillips curve; Inflation–unemployment trade-off; State–space estimation; Identification through heteroskedasticity;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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