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The European Phillips Curve: Does the NAIRU Exist?

Author

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  • Karanassou, Marika

    (Queen Mary, University of London)

  • Sala, Hector

    (Universitat Autònoma de Barcelona)

  • Snower, Dennis J.

    (Hertie School of Governance)

Abstract

This paper has two aims. First, it provides simple theoretical models that highlight two channels whereby monetary shocks have permanent real effects and the interactions between these channels. Second, it presents an empirical dynamic model, covering a panel of EU countries, and derives the implied long-run inflation-unemployment tradeoff. Our results suggest that the tradeoff is far from vertical. We also find that wage persistence plays a larger role than price persistence in generating the tradeoff, but that the two forms of persistence are complementary in giving monetary policy its long-run real effects. Our results call for a reassessment of the European macroeconomic experience.

Suggested Citation

  • Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2003. "The European Phillips Curve: Does the NAIRU Exist?," IZA Discussion Papers 876, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp876
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    More about this item

    Keywords

    inflation; Phillips curve; nominal inertia; monetary policy; business cycles; forward-looking expectations; unemployment; homogeneous dynamic panels; panel unit root tests;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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