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Some Explorations, Using Canadian Data, of the S-Variable in Akerlof, Dickens, and Perry (1996)

Author

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  • Seamus Hogan
  • Lise Pichette

Abstract

A number of authors have suggested that economies face a long-run inflation-unemployment trade-off due to downward nominal-wage rigidity. This theory has implications for the nature of the short-run Phillips curve when wage inflation is low. Akerlof, Dickens and Perry have developed an empirical model in which a variable (S) designed to capture the effect of downward nominal-wage rigidity is constructed as part of the estimation of the short-run Phillips curve. Adding this variable dramatically improves the dynamic out-of-sample inflation forecasts of the curve in both the United States and Canada. In this paper we perform a variety of tests using both real and constructed data to address whether the addition of S truly does provide a better estimate of the short-run Phillips curve, and whether this constitutes evidence that downward nominal-wage rigidity increases the natural rate of unemployment in times of low wage inflation. Our main conclusion is that the performance of the S-enhanced Phillips curve in dynamic simulations is independent of whether downward nominal-wage rigidity is an important feature of the macroeconomy.

Suggested Citation

  • Seamus Hogan & Lise Pichette, 2000. "Some Explorations, Using Canadian Data, of the S-Variable in Akerlof, Dickens, and Perry (1996)," Staff Working Papers 00-6, Bank of Canada.
    • Handle: RePEc:bca:bocawp:00-6
    DOI: 10.34989/swp-2000-6
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    References listed on IDEAS

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    1. Pierre Fortin, 1991. "The Phillips Curve, Macroeconomic Policy, and the Welfare of Canadians," Canadian Journal of Economics, Canadian Economics Association, vol. 24(4), pages 774-803, November.
    2. Pierre Fortin, 1996. "The Great Canadian Slump," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 761-787, November.
    3. Jean-François Fillion & André Léonard, 1997. "La courbe de Phillips au Canada : un examen de quelques hypothèses," Staff Working Papers 97-3, Bank of Canada.
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    Cited by:

    1. Pierre Fortin, 2013. "The Macroeconomics of Downward Nominal Wage Rigidity : a Review of the Issues and New Evidence for Canada," Cahiers de recherche 1309, CIRPEE.

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    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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