Long-run Phillips-type trade-offs in European Union countries

Abstract

The empirical methodology recently developed [Econ. Q. 83 (1997) p. 69] is employed to test for a zero long-run elasticity of the rate of unemployment with respect to permanent shocks in the rate of inflation. We use quarterly data spanning the last 30–40 years for Austria, Denmark, Finland, France, Germany, Italy, Spain, Sweden and the UK. There is considerable evidence against a vertical long-run Phillips curve, when the model is identified by specifying a short-run Phillips curve of the type favoured by Keynesian economists. Possible exceptions are Denmark, France and Germany, for which evidence against a vertical long-run Phillips curve is limited. When identification is achieved by postulating a short-run trade-off consistent with the monetarist rational expectations models, the vertical long-run Phillips curve cannot be rejected, except in the case of Italy.