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An estimation of the Phillips curve in Mexico using city-level data

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  • Lorenzo Aldeco Leo
  • Horacio Reyes Rocha

Abstract

We estimate the slope of the Phillips curve in Mexico between 2005 and 2020 using city level data. We overcome the endogeneity of unemployment and core inflation through a panel instrumental variable strategy. Time-period fixed effects account for aggregate supply, demand, and expectation variables, while possible endogeneity between unemployment and core inflation at the city-quarter level is addressed with local labor demand shock instruments. We find a statistically significant Phillips curve linking local unemployment to local core inflation in Mexico, but this relationship is relatively weak: an increase of 1 percentage point in city-level unemployment lowers year-on-year core inflation by approximately 0.18 percentage points. We analyze city-level characteristics that relate to steeper Phillips curves, and find that informality rates, cash transfers, and some demographic characteristics in cities strengthen the relationship between unemployment and inflation.

Suggested Citation

  • Lorenzo Aldeco Leo & Horacio Reyes Rocha, 2025. "An estimation of the Phillips curve in Mexico using city-level data," Working Papers 2025-14, Banco de México.
    • Handle: RePEc:bdm:wpaper:2025-14
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    Keywords

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    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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