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The price-price Phillips curve in small open economies and monetary unions

Author

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  • Andrea Vaona

    () (Department of Economics (University of Verona))

Abstract

This paper extends the efficiency wages / partially adaptive expectations Phillips curve, otherwise known as price-price Phillips curve, from a closed economy context to an open economy one with both commodity trade and capital mobility. We also consider the case of a monetary union (a country) with two member states (regions). Opening the trade account alters the slope of the Phillips curve in an ambiguous way and it makes its position a function of the change of foreign output too. Opening the capital account, after opening the trade one, does not affect the Phillips curve. Within a monetary union, the link between the size of a region and its weight in the Phillips curve has an a priori ambiguous sign. Once resorting to plausible numerical simulations, economic openness reduces the sacrifice ratio. Regarding a monetary union, aggregate inflation is more affected by regional unemployment dynamics the greater is the weight of the region in aggregate unemployment rate and output.

Suggested Citation

  • Andrea Vaona, 2011. "The price-price Phillips curve in small open economies and monetary unions," Working Papers 06/2011, University of Verona, Department of Economics.
  • Handle: RePEc:ver:wpaper:06/2011
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    More about this item

    Keywords

    efficiency wages; unemployment; Phillips curve; inflation; adaptive expectations;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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