A Traditional Nominal Wage Phillips Curve: Theory and Evidence

Abstract

By combining simple contracting schemes with firms' optimisation, we provide theoretical underpinnings to the traditional nominal wage Phillips curve. The parameters of our Phillips curve have a structural interpretation. We extend the model to include the effect of the labour share, a factor that is absent in the new Keynesian model. Empirically we find that the unemployment parameter of the traditional model is significant, and that of the forward‐looking model is wrongly signed. Furthermore, evidence suggests that inflation targeting was accompanied by the flattening of the curve, increased anchoring of inflation expectations and a decline in worker power.