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

Andrea Vaona

No 06/2011, Working Papers from University of Verona, Department of Economics

Abstract: This paper extends the efficiency wages / partially adaptive expectations Phillips curve, otherwise known as 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). Opening the trade account alters the slope of the Phillips curve in an ambiguous way and it makes its position a function of the change of foreign output too. Opening the capital account, after opening the trade one, does not affect the Phillips curve. Within a monetary union, the link between the size of a region and its weight in the Phillips curve has an a priori ambiguous sign. Once resorting to plausible numerical simulations, economic openness reduces the sacrifice ratio. Regarding a monetary union, aggregate inflation is more affected by regional unemployment dynamics the greater is the weight of the region in aggregate unemployment rate and output.

Keywords: efficiency wages; unemployment; Phillips curve; inflation; adaptive expectations (search for similar items in EconPapers)
JEL-codes: E20 E3 E40 E50 (search for similar items in EconPapers)
Pages: 14
Date: 2011-04
New Economics Papers: this item is included in nep-cba and nep-mac
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