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Trend, cycle, and non-linear trade-off in the Euro Area 1970-2001

  • Alvaro Aguiar


    (CEMPRE, Faculdade de Economia da Universidade do Porto)

  • Manuel M. F. Martins


    (CEMPRE, Faculdade de Economia da Universidade do Porto)

This paper presents new tests and estimates of the Phillips trade-off in the Euro Area, carried out in a unobserved components model with possibly non-linear Phillips and Okun relations, using quarterly aggregate data for the period 1970:I-2001:II. A concept of forward-looking near-rational expectations is introduced in the model, improving on the contradiction between rational expectations and evidence of inflation inertia. The Phillips curve turns out to be linear and its trade-off statistically significant, while non-linearity shows up in the Okun relation. The trend-cycle decompositions capture the main features of the Euro Area recent macroeconomic record.

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Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 122.

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Length: 45 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:por:fepwps:122
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  1. Apel, Mikael & Jansson, Per, 1999. "A theory-consistent system approach for estimating potential output and the NAIRU," Economics Letters, Elsevier, vol. 64(3), pages 271-275, September.
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  8. Camba-Méndez, Gonzalo & Rodriguez-Palenzuela, Diego, 2001. "Assessment criteria for output gap estimates," Working Paper Series 0054, European Central Bank.
  9. George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 823-838.
  10. Blanchard, Olivier J & Giavazzi, Francesco, 2001. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labour Markets," CEPR Discussion Papers 2713, C.E.P.R. Discussion Papers.
  11. Laurence Ball, 2000. "Near-rationality and inflation in two monetary regimes," Proceedings, Federal Reserve Bank of San Francisco.
  12. 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.
  13. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
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