Instability and Nonlinearity in the Euro Area Phillips Curve

40 Pages Posted: 26 Sep 2007

See all articles by Alberto Musso

Alberto Musso

European Central Bank (ECB)

Livio Stracca

European Central Bank (ECB)

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: September 2007

Abstract

This paper provides a comprehensive analysis of the functional form of the euro area Phillips curve over the past three decades. In particular, compared to previous literature we analyse the stability of the relationship in detail, especially as regards the possibility of a time-varying mean of inflation. Moreover, we conduct a sensitivity analysis across different measures of economic slack. Our main findings are two. First, there is strong evidence of time variation in the mean and slope of the Phillips curve occurring in the early to mid 1980s, but not in inflation persistence once the mean shift is allowed for. As a result of the structural change, the Phillips curve became flatter around a lower mean of inflation. Second, we find no significant evidence of non-linearity, in particular in relation to the output gap.

Keywords: Inflation, output gap, structural change, asymmetry, smooth transition model

JEL Classification: E52, E58

Suggested Citation

Musso, Alberto and Stracca, Livio and van Dijk, Dick J.C., Instability and Nonlinearity in the Euro Area Phillips Curve (September 2007). ECB Working Paper No. 811, Available at SSRN: https://ssrn.com/abstract=1010956 or http://dx.doi.org/10.2139/ssrn.1010956

Alberto Musso (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Livio Stracca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

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