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The Return of the Wage Phillips Curve

  • Galí, Jordi

The standard New Keynesian model with staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment. Under some assumptions, that relation takes a form similar to that found in empirical applications--starting with the original Phillips (1958) curve--and may thus be viewed as providing some theoretical foundations to the latter. The structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the U.S. economy, even under the strong assumption of a constant natural rate of unemployment.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7700.

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Date of creation: Feb 2010
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Handle: RePEc:cpr:ceprdp:7700
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  1. Ellen R. McGrattan & Patrick J. Kehoe & V. V. Chari, 2008. "New Keynesian models: not yet useful for policy analysis," Working Papers 664, Federal Reserve Bank of Minneapolis.
  2. Jordi Galí & Frank Smets & Rafael Wouters, 2011. "Unemployment in an Estimated New Keynesian Model," Working Papers 541, Barcelona Graduate School of Economics.
  3. Carlos Thomas, 2006. "Search and Matching Frictions and Optimal Monetary Policy," CEP Discussion Papers dp0743, Centre for Economic Performance, LSE.
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  5. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
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  7. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
  8. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October.
  9. Hamid Mehran & Joseph Tracy, 2001. "The effect of employee stock options on the evolution of compensation in the 1990s," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 17-34.
  10. Argia M. Sbordone, 2006. "U.S. Wage and Price Dynamics: A Limited-Information Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
  11. Maćkowiak, Bartosz & Smets, Frank, 2008. "On implications of micro price data for macro models," Working Paper Series 0960, European Central Bank.
  12. Christopher J. Erceg & Luca Guerrieri & Christopher Gust, 2006. "SIGMA: A New Open Economy Model for Policy Analysis," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
  13. Christoffel, Kai & Coenen, Günter & Warne, Anders, 2008. "The New Area-Wide Model of the euro area: a micro-founded open-economy model for forecasting and policy analysis," Working Paper Series 0944, European Central Bank.
  14. Gali, Jordi, 1996. "Unemployment in dynamic general equilibrium economies," European Economic Review, Elsevier, vol. 40(3-5), pages 839-845, April.
  15. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
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