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Is the unemployment–inflation trade‐off still alive in the Euro Area and its member countries? It seems so

Antonio Ribba ()

The World Economy, 2020, vol. 43, issue 9, 2393-2410

Abstract: The unemployment–inflation trade‐off can be interpreted as a proposition concerning the response of these two variables to aggregate demand shocks. In this paper, we study the possible presence of the trade‐off in the Euro Area and in a wide group of Euro‐area countries in the last 20 years, that is, since the start of EMU. We use the structural VAR methodology that allows the separation between supply and demand shocks. Our main finding is that the existence of a trade‐off is largely confirmed both at the Euro Area and at the national level. Nevertheless, the size of the trade‐off, measured at different horizons, shows some heterogeneity among countries. No less important, when we augment the VAR model by introducing monetary policy in the context of an open economy, we find that monetary policy shocks push inflation and unemployment in opposite directions in the currency area. Another interesting result concerns the evidence of a relatively flat relation between unemployment and inflation, conditionally to monetary policy shocks. The bulk of these conclusions seem to be confirmed by a number of robustness checks.

Date: 2020
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