An estimation of the Phillips curve in Mexico using city-level data

Lorenzo Aldeco Leo and Horacio Reyes Rocha

No 2025-14, Working Papers from Banco de México

Abstract: We estimate the slope of the Phillips curve in Mexico between 2005 and 2020 using city level data. We overcome the endogeneity of unemployment and core inflation through a panel instrumental variable strategy. Time-period fixed effects account for aggregate supply, demand, and expectation variables, while possible endogeneity between unemployment and core inflation at the city-quarter level is addressed with local labor demand shock instruments. We find a statistically significant Phillips curve linking local unemployment to local core inflation in Mexico, but this relationship is relatively weak: an increase of 1 percentage point in city-level unemployment lowers year-on-year core inflation by approximately 0.18 percentage points. We analyze city-level characteristics that relate to steeper Phillips curves, and find that informality rates, cash transfers, and some demographic characteristics in cities strengthen the relationship between unemployment and inflation.

Keywords: Phillips Curve; Core Inflation; Unemployment; Instrumental Variables; Panel Data; Labor Market (search for similar items in EconPapers)
JEL-codes: C23 C26 E31 J23 O54 (search for similar items in EconPapers)
Date: 2025-09
New Economics Papers: this item is included in nep-lma
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