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Unemployment and inflation in Ireland: 1926–2012

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Abstract

Since the 1970s, the overarching view in the literature has been that a Phillips curve relationship did not exist in Ireland prior to the 1979 exchange rate break with Sterling. It was argued that, as a small open economy, prices were determined externally. To test this relationship, we study the determination of inflation between 1926 and 2012, a longer sample period than any previously used. We find that the difference between unemployment and the NAIRU is a significant determinant of inflation both in the full sample and in the subsamples spanning the periods before and after the Sterling parity link.

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Notes

  1. See for example, Geary and McCarthy (1976), Geary (1976), Honohan and Flynn (1986) and Kenny and McGettigan (1997). See Sect. 3 for a more detailed discussion.

  2. In more recent work, Haldane and Quah (1999) examine the evolution of the UK Phillips curve since the 1950s, paying particular attention to the role of policy-makers’ beliefs. Gruen et al. (1999) conduct a similar exercise for Australia, paying particular attention to structural changes in the labour market and the role of import prices.

  3. This section draws on Brennan (1931), Moynihan (1975), Honohan (1995), Ó Gráda (1997) and Kelly (2003).

  4. See Honohan (1995).

  5. See Artis and Taylor (1994, Table 1).

  6. Furthermore, the standard deviation of inflation was much lower after 1999 than before.

  7. For a discussion of these measures, see Lee (1989).

  8. See the discussion in Ó Gráda (1997).

  9. Barry et al. (1999).

  10. For a discussion, see Fitzgerald (1999).

  11. For example, see Honohan (1984).

  12. See, for example, Browne (1984), Callan and Fitzgerald (1989), Honohan and Flynn (1986) and O’Connell and Frain (1989).

  13. Of course, it is possible that demand factors impact on production costs, for instance, if wage rates depend on business conditions.

  14. For instance, a Phillips curve relationship has been used to explain why core inflation failed to decline and why unemployment rose so dramatically in the aftermath of the ‘Great Recession’. Montoya and Döhring (2011) summarize the recent evidence.

  15. For an excellent review of the literature on changes in the inflation process over time and some empirical evidence for the USA, see Cecchetti et al. (2007).

  16. If the constant in the equation was fixed, Kalman filtering could be used to obtain direct estimates of the NAIRU. In this model in which the constant may change, we cannot distinguish between changes in the intercept and in the NAIRU.

  17. Consumption and investment data for the 1938–1944 period are available from a White Paper on National Income and Expenditure presented to the Oireachtas in March 1946; real GDP data are taken from Gerlach and Stuart (2014).

  18. See the online databases for the IMF’s World Economic Outlook in October 2008 compared to the database for October 2009.

  19. A two-year lag from unemployment to inflation might seem long. However, one would normally expect about a 4-quarter lag from the output gap to inflation. Since unemployment is a lagging variable in the business cycle, a longer lag from unemployment to inflation seems plausible.

  20. The test is conditional on the estimated values for the parameters on the dummy variables.

  21. The referee has suggested that the impact on unemployment on inflation has become more rapid in the latter part of the sample. This conjecture is in fact quite correct: in the second sample, the results are broadly similar if the once- or twice-lagged unemployment rate is used; this is not the case in the first sample.

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Authors and Affiliations

  1. CEPR, Central Bank of Ireland, PO Box No. 559, Dame Street, Dublin 2, Ireland

    Stefan Gerlach

  2. Central Bank of Ireland, PO Box No. 559, Dame Street, Dublin 2, Ireland

    Reamonn Lydon & Rebecca Stuart

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  1. Stefan Gerlach
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  2. Reamonn Lydon
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  3. Rebecca Stuart
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Correspondence to Rebecca Stuart.

Additional information

This is a completely revised version of an earlier paper entitled ‘The Irish Phillips Curve since 1935’. The views expressed in this paper are solely our own. We are very much indebted to a referee for comments that substantially strengthened the paper.

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Gerlach, S., Lydon, R. & Stuart, R. Unemployment and inflation in Ireland: 1926–2012. Cliometrica 10, 345–364 (2016). https://doi.org/10.1007/s11698-015-0134-1

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