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Kinky Europe: Evidence from the Regional Phillips Curve in the Euro Area

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Listed:
  • Marius Faber
  • Gabriel Züllig

Abstract

We estimate the slope of the Phillips curve in the euro area, allowing for nonlinearities – or kinks – in the relationship between labor market slack and inflation. We exploit cross-country variation in labor market conditions in the period 2001–2024, absorbing aggregate shocks and endogenous monetary policy reactions with time fixed effects. We find that, while the Phillips curve is usually quite flat, it becomes at least three times steeper when the labor market is sufficiently tight. This kink is more pronounced in the euro area than in the United States, potentially due to more rigid labor markets. Our estimates suggest, however, that despite this nonlinearity, most of the post-pandemic inflation surge is attributable to factors other than labor market tightness.

Suggested Citation

  • Marius Faber & Gabriel Züllig, 2025. "Kinky Europe: Evidence from the Regional Phillips Curve in the Euro Area," CESifo Working Paper Series 12084, CESifo.
    • Handle: RePEc:ces:ceswps:_12084
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    References listed on IDEAS

    as
    1. Hooper, Peter & Mishkin, Frederic S. & Sufi, Amir, 2020. "Prospects for inflation in a high pressure economy: Is the Phillips curve dead or is it just hibernating?," Research in Economics, Elsevier, vol. 74(1), pages 26-62.
    2. Emmanuel De Veirman, 2022. "How Does the Phillips Curve Slope Vary with Repricing Rates?," Working Papers 735, DNB.
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    Cited by:

    1. Guido Ascari & Alexandre Carrier & Emanuel Gasteiger & Alex Grimaud & Gauthier Vermandel, 2025. "Monetary policy in the Euro Area, when Phillips curves ... are curves (Guido Ascari, Alexandre Carrier, Emanuel Gasteiger, Alex Grimaud, Gauthier Vermandel)," Working Papers 270, Oesterreichische Nationalbank (Austrian Central Bank).

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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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