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Is There a Long Run Unemployment-Inflation Trade-off in Sweden?

Author

Listed:
  • Lundborg, Per

    (Trade Union Institute for Economic Research)

  • Sacklén, Hans

    (Trade Union Institute for Economic Research)

Abstract

We present a small open economy version of Akerlof, Dickens and Perry (2000) and, based on Swedish data, we show that there exists a negatively sloped long run Phillips curve. Regressions on quarterly data 1963-2000 and estimated inflation expectations show that this Phillips curve is relatively robust and that an unemployment rate of close to two percent is consistent with an inflation target slightly above its present level of two percent. However, estimations based on survey data suggest that a considerably higher inflation rate, of around four percent, is necessary to yield a lowest sustainable unemployment rate. These latter estimates seem better adjusted to the recent Swedish macroeconomic experiences. If Sweden enters the EMU, and if the ECB targets inflation at a lower level than the Riksbank, employment as well as output will be lower than today. Moreover, if the inflation-unemployment trade-off differs widely across the member states of the EMU, then a single inflation rate in the EMU-area implies that long run unemployment rates will also differ across the member countries.

Suggested Citation

  • Lundborg, Per & Sacklén, Hans, 2001. "Is There a Long Run Unemployment-Inflation Trade-off in Sweden?," Working Paper Series 173, Trade Union Institute for Economic Research.
  • Handle: RePEc:hhs:fiefwp:0173
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    File URL: http://swopec.hhs.se/fiefwp/papers/WP173.pdf
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    References listed on IDEAS

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    1. Thomas J. Sargent, 1973. "Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(2), pages 429-480.
    2. George A. Akerlof & William T. Dickens & George L. Perry, 2000. "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 1-60.
    3. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    4. Ray C. Fair, 2000. "Testing the NAIRU Model for the United States," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 64-71, February.
    5. Holden,S., 2001. "Monetary policy and nominal rigidities under low inflation," Memorandum 16/2001, Oslo University, Department of Economics.
    6. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678-678.
    7. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
    8. King, Robert G. & Watson, Mark W., 1994. "The post-war U.S. phillips curve: a revisionist econometric history," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 157-219, December.
    9. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
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    Citations

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    Cited by:

    1. Michael F. Bryan & Stefan Palmqvist, 2005. "Testing near-rationality using detailed survey data," Working Paper 0502, Federal Reserve Bank of Cleveland.
    2. Liam Graham & Dennis J. Snower, 2008. "Hyperbolic Discounting and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 427-448, March.
    3. Steinar Holden, 2004. "Wage Formation under Low Inflation," CESifo Working Paper Series 1252, CESifo Group Munich.
    4. Holmlund, Bertil, 2003. "The Rise and Fall of Swedish Unemployment," Working Paper Series 2003:13, Uppsala University, Department of Economics.
    5. Lundborg, Per, 2005. "Wage Fairness, Growth and the Utilization of R&D Workers," Working Paper Series 206, Trade Union Institute for Economic Research.
    6. Selén, Jan & Ståhlberg, Ann-Charlotte, 2004. "Wage and Compensation Inequality — How Different?," Working Paper Series 197, Trade Union Institute for Economic Research.
    7. Norén, Ronny, 2002. "Europe’s Lack of Structural Transformation and Necessary Policy Changes of EMU," Umeå Economic Studies 598, Umeå University, Department of Economics.
    8. Bryan, Michael F. & Palmqvist, Stefan, 2005. "Testing Near-Rationality using Detailed Survey Data," Working Paper Series 183, Sveriges Riksbank (Central Bank of Sweden).
    9. Steinar Holden, 2004. "The Costs of Price Stability: Downward Nominal Wage Rigidity in Europe," Economica, London School of Economics and Political Science, vol. 71(281), pages 183-208, May.
    10. Stefan Palmqvist & Michael F. Bryan, 2005. "Testing Near-Rationality Using Detail Survey Data," Computing in Economics and Finance 2005 371, Society for Computational Economics.

    More about this item

    Keywords

    Phillips curve; Efficiency wages; Near-rationality;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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