Abstract
This paper combines a Phillips curve and a disequilibrium model of the labor market. The novel feature of the model is that both the Phillips curve and the equation that links excess labor supply and unemployment contain lagged latent variables, which makes standard estimation methods untractable. We turn to the dynamic simulated pseudo-maximum likelihood method proposed in Laroque-Salanie [1993] to estimate the model on French and German data. Our estimates produce an excellent fit for unemployment in both countries. They suggest that a Keynesian reflation policy would have stronger effects in Germany than in France.
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