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The Long-Run Phillips Curve: A Structural VAR Investigation

Luca Benati ()

No 929, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: I use structural VARs identified based on either long-run restrictions, or a combination of long-run and sign restrictions, to investigate the long-run tradeoff between inflation and the unemployment rate in the U.S., the Euro area, the U.K., Canada and Australia over the post-WWII period. Results based on VARs featuring a single permanent inflation shock do not allow to reject the null hypothesis of a vertical long-run Phillips curve for either country. Results based on VARs allowing for four permanent inflation shocks, which are sorted out from one another by means of DSGE-based robust sign restrictions, produce a very similar picture. The overall extent of uncertainty is however substantial, thus suggesting that the data are compatible with a comparatively wide range of possible slopes of the long-run trade-off. For all countries, Johansen's cointegration tests point towards the presence of cointegration between either inflation and unemployment, or inflation, unemployment, and a short-term interest rate, with the long-run Phillips trade-off implied by the estimated cointegrating vectors being negative and sizeable. I argue however that this evidence should be discounted, as, conditional on the estimated structural VARs--which, by construction, do not feature cointegration between any variable--Johansen's procedure tends to spuriously detect cointegration a non-negligible, and sometimes large, fraction of the times.

Date: 2015
New Economics Papers: this item is included in nep-eec and nep-mac
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More papers in 2015 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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