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The price-price Phillips curve in small open economies and monetary unions: theory and empirics

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  • Andrea Vaona

Abstract

This paper extends the efficiency wages/partially adaptive expectations Phillips curve, otherwise known as the price-price Phillips curve, from a closed economy context to an open economy one with both commodity trade and capital mobility. We also consider the case of a monetary union (a country) with two member states (regions). The theoretical results are a priori ambiguous. However, in the first place, on resorting to plausible numerical simulations, economic openness increases the reactiveness of inflation to the unemployment rate. In regard to a monetary union, the national unemployment multiplier in the aggregate Phillips curve decreases with the weight of the member state in aggregate employment and increases with that in output. Secondly, we show in two empirical applications that our calibration can provide informative priors for models to be estimated thanks to the Kalman filter. Copyright Springer-Verlag Berlin Heidelberg 2015

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  • Andrea Vaona, 2015. "The price-price Phillips curve in small open economies and monetary unions: theory and empirics," International Economics and Economic Policy, Springer, vol. 12(2), pages 281-307, June.
    • Handle: RePEc:kap:iecepo:v:12:y:2015:i:2:p:281-307
    DOI: 10.1007/s10368-014-0270-2
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    1. Alberto Montagnoli & Andrea Vaona, 2015. "Searching for Money Illusion in Europe," Working Papers 10/2015, University of Verona, Department of Economics.

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    More about this item

    Keywords

    Efficiency wages; Unemployment; Phillips curve; Inflation; Adaptive expectations; Kalman filter; E3; E20; E40; E50; F15; F41; C22; C26;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F15 - International Economics - - Trade - - - Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

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