Wage and Price Phillips Curves An empirical analysis of destabilizing wage-price spirals

Peter Flaschel and Hans-Martin Krolzig

No 2003-W16, Economics Papers from Economics Group, Nuffield College, University of Oxford

Abstract: In this paper we introduce a small Keynesian model of economic growth which is centered around two advanced types of Phillips curves, one for money wages and one for prices, both being augmented by perfect myopic foresight and supplemented by a measure of the medium-term inflationary climate updated in an adaptive fashion. The model contains two potentially destabilizing feedback chains, the so-called Mundell and Rose-effects. We estimate parsimonious and congruent Phillips curves for money wages and prices in the US over the past five decades. Using the parameters of the empirical Phillips curves, we show that the growth path of the private sector of the model economy is likely to be surrounded by centrifugal forces. Convergence to this growth path can be generated in two ways: a Blanchard-Katz-type error-correction mechanism in the money-wage Phillips curve or a modified Taylor rule that is augmented by a term, which transmits increases in the wage share (real unit labor costs) to increases in the nominal rate of interest. Thus the model is characterized by local instability of the wage-price spiral, which however can be tamed by appropriate wage or monetary policies. Our empirical analysis finds the error-correction mechanism being ineffective in both Phillips curves suggesting that the stability of the post-war US macroeconomy originates from the stabilizing role of monetary policy.

Keywords: Phillips curves; Mundell effect; Rose effect; Monetary policy; Taylor Rule; Inflation; Unemployment; Instability (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 J30 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2003-01-01
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:nuf:econwp:0316

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