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Is There a Long Run Unemployment-Inflation Trade-off in Sweden?

Per Lundborg and Hans Sacklén
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Hans Sacklén: Trade Union Institute for Economic Research, Postal: FIEF, Wallingatan 38, SE-111 24 Stockholm, Sweden

No 173, Working Paper Series from Trade Union Institute for Economic Research

Abstract: We present a small open economy version of Akerlof, Dickens and Perry (2000) and, based on Swedish data, we show that there exists a negatively sloped long run Phillips curve. Regressions on quarterly data 1963-2000 and estimated inflation expectations show that this Phillips curve is relatively robust and that an unemployment rate of close to two percent is consistent with an inflation target slightly above its present level of two percent. However, estimations based on survey data suggest that a considerably higher inflation rate, of around four percent, is necessary to yield a lowest sustainable unemployment rate. These latter estimates seem better adjusted to the recent Swedish macroeconomic experiences. If Sweden enters the EMU, and if the ECB targets inflation at a lower level than the Riksbank, employment as well as output will be lower than today. Moreover, if the inflation-unemployment trade-off differs widely across the member states of the EMU, then a single inflation rate in the EMU-area implies that long run unemployment rates will also differ across the member countries.

Keywords: Phillips curve; Efficiency wages; Near-rationality (search for similar items in EconPapers)
JEL-codes: E24 E31 J41 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2001-12-28
New Economics Papers: this item is included in nep-ifn and nep-lab
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