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June 2009 issue
List of authors
 
Pagratis, Stringa
Ehrmann, Fratzscher
Goodhart
Ferrero, Nobili
Sveen, Weinke
Musso, Stracca, van Dijk
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Instability and Nonlinearity in the Euro-Area Phillips Curve

by Alberto Mussoa, Livio Straccaa and Dick van Dijkb

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 with previous literature, we analyze 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 nonlinearity - in particular, in relation to the output gap.

JEL Codes: E52, E58.

 
Full article (PDF, 32 pages 523 kb)


a European Central Bank
b Econometric Institute, Erasmus University Rotterdam