Trend, cycle, and non-linear trade-off in the Euro Area 1970-2001

Alvaro Aguiar () and Manuel Martins
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Alvaro Aguiar: CEMPRE, Faculdade de Economia da Universidade do Porto

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: This paper presents new tests and estimates of the Phillips trade-off in the Euro Area, carried out in a unobserved components model with possibly non-linear Phillips and Okun relations, using quarterly aggregate data for the period 1970:I-2001:II. A concept of forward-looking near-rational expectations is introduced in the model, improving on the contradiction between rational expectations and evidence of inflation inertia. The Phillips curve turns out to be linear and its trade-off statistically significant, while non-linearity shows up in the Okun relation. The trend-cycle decompositions capture the main features of the Euro Area recent macroeconomic record.

Keywords: Trend and cycle; Unobserved-components; Kalman filter; Phillips curve; Okun law; Near-rational expectations. (search for similar items in EconPapers)
JEL-codes: C32 E31 E32 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2003-03
New Economics Papers: this item is included in nep-eec, nep-ets and nep-mac
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:122

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