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The Long-Run Phillips Curve and Non-Stationary Inflation

  • Bill Russell, Anindya Banerjee

Modern theories of inflation incorporate a vertical long-run Phillips curve and are usually estimated using techniques that ignore the non-stationary behaviour of inflation. Consequently, the estimates obtained are imprecise and are unable to distinguish between competing models of inflation and test the veracity of a vertical long-run Phillips curve. We estimate a Phillips curve model taking into account the non-stationary properties in inflation and identify a small but significant positive relationship between inflation and unemployment. The results provide some evidence that the trade-off between inflation and the unemployment rate in the short-run worsens as the mean rate of inflation increases.

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Paper provided by European University Institute in its series Economics Working Papers with number ECO2006/16.

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Date of creation: 2006
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Handle: RePEc:eui:euiwps:eco2006/16
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