Testing the significance and the non-linearity of the Phillips trade-off in the Euro Area
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This paper tests the significance and the non-linearity of the Phillips trade-off in the aggregate Euro Area, in an unobserved components model of stochastic NAIRU and trend output featuring the Phillips equation and the Okun law as main identifying equations, with quarterly data for 1970:I-2002:III. The Phillips curve turns out to be linear and its trade-off statistically significant, while non-linearity shows up in the Okun relation. The results prove to be robust to alternative lag length structures of the model, and to alternative non-linear functional forms. The trend-cycle decompositions estimated with the model capture the main features of the Euro Area’s recent macroeconomic record.
KeywordsPhillips curve Okun law non-linearity NAIRU unobserved-components Kalman filter
JEL classificationE31 E32 C32
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