TESTING WAGE AND PRICE PHILLIPS CURVES FOR THE UNITED STATES

Peter Flaschel, Göran Kauermann and Willi Semmler

Metroeconomica, 2007, vol. 58, issue 4, 550-581

Abstract: This paper demonstrates how the labour and product markets interact in determining as outcome a generalized reduced‐form price Phillips curve. For the labour market we consider a wage Phillips curve and for the product market a price Phillips curve. We estimate separately the wage and price Phillips curves for the USA, using ordinary least squares, non‐parametric estimation and three‐stage least squares techniques. The finding is that wages are always more flexible than prices with respect to their respective demand pressure and that price inflation responds somewhat more to a medium‐run cost pressure than does wage inflation. The implications for macroeconomic stability are demonstrated. We also show—as a link between product and labour markets—that employment is related to output as Okun's law states. In comparing linear and non‐linear estimates of the wage and price Phillips curves we find furthermore that for some relationships non‐linearities are important while not for others. Although overall the non‐linear estimates tend to confirm our linear estimates, non‐linearities in some relationships of the Phillips curve are important as well.

Date: 2007
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