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IZA
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The European Phillips Curve: Does the NAIRU Exist?
by
Marika Karanassou, Hector Sala, Dennis J. Snower
(September 2003)
published in: Applied Economics Quarterly, 2003, 49 (2), 93-121
Abstract:
This paper has two aims. First, it provides simple theoretical models that highlight two
channels whereby monetary shocks have permanent real effects and the interactions
between these channels. Second, it presents an empirical dynamic model, covering a panel
of EU countries, and derives the implied long-run inflation-unemployment tradeoff. Our
results suggest that the tradeoff is far from vertical. We also find that wage persistence plays
a larger role than price persistence in generating the tradeoff, but that the two forms of
persistence are complementary in giving monetary policy its long-run real effects. Our results
call for a reassessment of the European macroeconomic experience.
Text: See Discussion Paper No. 876 
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