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Aggregation and euro area Phillips curves

  • Fabiani, Silvia
  • Morgan, Julian

This paper examines the issue of the impact of aggregation in the empirical analysis of euro area labour markets. A Phillips Curve describing the adjustment of unit labour costs is estimated at the national and aggregate level for the 5 largest euro area countries. Potential sources of aggregation bias are investigated ­ such as differences in parameter coefficients and a lack of correlation in the independent variables across countries ­ as well as the potentially offsetting statistical averaging effect. Finally the out-of-sample forecasting performance of both approaches is evaluated. The results point to some limited advantages of analysing wage developments at the national rather than at the area-wide level. The paper concludes that if major advantages in undertaking national analysis do exist, they are likely to arise from the ability to develop country-specific structures for the Phillips Curves and not from aggregation biases that emerge when a common structure is used. JEL Classification: C52, C53, E24, J30

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Paper provided by European Central Bank in its series Working Paper Series with number 0213.

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Date of creation: Feb 2003
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Handle: RePEc:ecb:ecbwps:20030213
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  1. Fabiani, Silvia & Mestre, Ricardo, 2000. "Alternative measures of the NAIRU in the euro area: estimates and assessment," Working Paper Series 0017, European Central Bank.
  2. Luca Dedola & Eugenio Gaiotti & Luca Silipo, 2004. "Money Demand in theEuroArea: Do National Differences Matter?," Macroeconomics 0404019, EconWPA, revised 24 Apr 2004.
  3. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Publishing.
  4. Fabiani, Silvia & Mestre, Ricardo, 2001. "A system approach for measuring the euro area NAIRU," Working Paper Series 0065, European Central Bank.
  5. Silvia Fabiani & Alberto Locarno & Gian Paolo Oneto & Paolo Sestito, 1997. "NAIRU: Incomes Policy and Inflation," OECD Economics Department Working Papers 187, OECD Publishing.
  6. Gabriel Fagan & JÊrÆme Henry, 1998. "Long run money demand in the EU: Evidence for area-wide aggregates," Empirical Economics, Springer, vol. 23(3), pages 483-506.
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