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Short- and Long-run Phillips Trade-offs and the Cost of Disinflationary Policies

Author

Listed:
  • Dolado, Juan J.
  • López-Salido, J David
  • Vega, Juan Luis

Abstract

This paper studies the joint behaviour of inflation and unemployment in Spain over the period 1964–95 in order to estimate dynamic Phillips trade-offs and sacrifice ratios in response to a demand shock. We organize our empirical approach as a structural (albeit eclectic) one. In so doing, we use a Structural VAR to identify demand shocks in a framework where the high persistence in both series allows us to differentiate between permanent and transitory components. Our eclecticism comes from using three alternative identifying schemes which fit the data equally well, but place different emphasis on the effects of demand shocks on the unemployment rate. Our estimates suggest, according to the reader’s prior belief (Keynesian or monetarist), that a one percentage point reduction in inflation following an aggregate demand contraction is associated with cumulated output losses of between 2.6% and 5% over five years.

Suggested Citation

  • Dolado, Juan J. & López-Salido, J David & Vega, Juan Luis, 1996. "Short- and Long-run Phillips Trade-offs and the Cost of Disinflationary Policies," CEPR Discussion Papers 1483, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1483
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    Citations

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    Cited by:

    1. Joseph Djivre & Sigal Ribon, 2003. "Inflation, Unemployment, The Exchange Rate, And Monetary Policy In Israel, 1990–99: A Svar Approach," Israel Economic Review, Bank of Israel, vol. 1(2), pages 71-99.
    2. Laurence Boone & Benoît Mojon, 1998. "Sacrifice Ratios in Europe: a Comparison," Working Papers 1998-07, CEPII research center.

    More about this item

    Keywords

    Phillips Trade-offs; Sacrifice Ratio; Shocks; Vector Autoregressions;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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