DP4102 The European Phillips Curve: Does the NAIRU Exist?

Author(s): Marika Karanassou, Hector Sala, Dennis J. Snower
Publication Date: October 2003
Keyword(s): business cycles, forward-looking expectations, homogeneous dynamic panels, inflation, monetary policy, nominal inertia, panel unit root tests, Phillips curve, unemployment
JEL(s): E2, E3, E4, E5, J3
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4102

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.