Abstract
AbstractThe unemployment–inflation trade‐off can be interpreted as a proposition concerning the response of these two variables to aggregate demand shocks. In this paper, we study the possible presence of the trade‐off in the Euro Area and in a wide group of Euro‐area countries in the last 20 years, that is, since the start of EMU. We use the structural VAR methodology that allows the separation between supply and demand shocks. Our main finding is that the existence of a trade‐off is largely confirmed both at the Euro Area and at the national level. Nevertheless, the size of the trade‐off, measured at different horizons, shows some heterogeneity among countries. No less important, when we augment the VAR model by introducing monetary policy in the context of an open economy, we find that monetary policy shocks push inflation and unemployment in opposite directions in the currency area. Another interesting result concerns the evidence of a relatively flat relation between unemployment and inflation, conditionally to monetary policy shocks. The bulk of these conclusions seem to be confirmed by a number of robustness checks.
Highlights
In this paper we want to investigate the existence of a negative relation, i.e. a possible trade-off, between unemployment and inflation in the Euro Area and its member countries in the last 20 years
Another interesting result of this study regards the conclusion that in recent decades the relation between unemployment and inflation could be better described in terms of the old Phillips curve prevailing in the 60s, i.e. an inverse relation between the two variables specified in levels, rather than in terms of the accelerationist model dominating the subsequent periods, in which following the lead of Friedman (1968) the unemployment rate was related to the changes in inflation
In France, Italy and Spain we detect a negative relation between the two variables and, we find that the demand shocks exert persistent and significant effects on both inflation and unemployment
Summary
In this paper we want to investigate the existence of a negative relation, i.e. a possible trade-off, between unemployment and inflation in the Euro Area and (some of) its member countries in the last 20 years. Twenty years of EMU, with a single currency for Member States and the related conduct of monetary policy at the Euro-area supranational level, may represent a sufficiently long period to undertake an empirical investigation on a topic as important as the unemployment-inflation trade-off. Maybe the most surprising result of our study is that all Euro-area countries considered in this investigation show similar responses of inflation and unemployment to aggregate demand shocks: in almost all cases we detect the existence of an inverse and persistent relation between these two variables.
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