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Does Modern Econometrics replicate the Phillips Curve?

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  • Shadman-Mehta, Fatemeh

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

This paper reexamines the existence of a long-run relationship between wages and unemployment in the U.K., with data over the period 1860-1913 used by A.W. Phillips to derive the well-known Phillips Curve. Using Johansen's maximum likelihood method of testing for cointegration, a long-run inverse relationship is indeed depicted between the rate of inflation and the unemployment rate. However, the main impact of deviations from this long-run equilibrium is on the unemployment rate rather than the rate of inflation.

Suggested Citation

  • Shadman-Mehta, Fatemeh, 1996. "Does Modern Econometrics replicate the Phillips Curve?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1996015, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:1996015
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/9615.pdf
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    References listed on IDEAS

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    1. Engle, Robert F. & Hendry, David F., 1993. "Testing superexogeneity and invariance in regression models," Journal of Econometrics, Elsevier, pages 119-139.
    2. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, pages 573-619.
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    4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, pages 817-838.
    5. Ericsson, Neil R., 1992. "Cointegration, exogeneity, and policy analysis: An overview," Journal of Policy Modeling, Elsevier, pages 251-280.
    6. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    7. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-328, August.
    8. Hendry, David F & Doornik, Jurgen A, 1994. "Modelling Linear Dynamic Econometric Systems," Scottish Journal of Political Economy, Scottish Economic Society, pages 1-33.
    9. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-472, August.
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    11. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-228, August.
    12. Wulwick, Nancy J, 1989. "Phillips' Approximate Regression," Oxford Economic Papers, Oxford University Press, vol. 41(1), pages 170-188, January.
    13. Engle, R. & Hendry, D., 1990. "Testing Super Exogeneity And Invariance In Regression Models," Economics Series Working Papers 99100, University of Oxford, Department of Economics.
    14. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 19-46.
    15. Neil R. Ericsson, 1991. "Cointegration, exogeneity, and policy analysis: an overview," International Finance Discussion Papers 415, Board of Governors of the Federal Reserve System (U.S.).
    16. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, pages 231-254.
    17. Gilbert, C L, 1976. "The Original Phillips Curve Estimates," Economica, London School of Economics and Political Science, vol. 43(169), pages 51-57, February.
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    Citations

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    Cited by:

    1. Eric Heyer & Hervé Le Bihan & Frédéric Lerais, 2000. "Relation de Phillips, boucle prix-salaire : une estimation par la méthode de Johansen," Économie et Prévision, Programme National Persée, pages 43-60.
    2. Golinelli Roberto, 1998. "Fatti stilizzati e metodi econometrici "moderni": una rivisitazione della curva di Phillips per l'Italia (1951-1996)," Politica economica, Società editrice il Mulino, issue 3, pages 411-446.
    3. Jérôme Creel, 1999. "The stability pact and feedback policy effects," Sciences Po publications N°99-02, Sciences Po.
    4. Castle, Jennifer L. & Fawcett, Nicholas W.P. & Hendry, David F., 2010. "Forecasting with equilibrium-correction models during structural breaks," Journal of Econometrics, Elsevier, pages 25-36.
    5. Castle, Jennifer L. & Hendry, David F., 2009. "The long-run determinants of UK wages, 1860-2004," Journal of Macroeconomics, Elsevier, pages 5-28.
    6. A. G. Sleeman, 2011. "Retrospectives: The Phillips Curve: A Rushed Job?," Journal of Economic Perspectives, American Economic Association, pages 223-238.
    7. Mohammed Saiful Islam & Riduanul Mustafa, 2017. "Quest for a Valid Phillips Curve in the Long Run: An Empirical Approach," International Business Research, Canadian Center of Science and Education, pages 191-198.
    8. R. Golinelli, 1998. "Fatti stilizzati e metodi econometrici "Moderni": una rivalutazione della Curva di Phillips per l'Italia (1951-1996)," Working Papers 313, Dipartimento Scienze Economiche, Universita' di Bologna.

    More about this item

    Keywords

    Phillips Curve; long-run equilibrium; cointegration;

    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
    • 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

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