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TESTING WAGE AND PRICE PHILLIPS CURVES FOR THE UNITED STATES
Author(s) -
Flaschel Peter,
Kauermann Göran,
Semmler Willi
Publication year - 2007
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/j.1467-999x.2007.00283.x
Subject(s) - phillips curve , economics , ordinary least squares , inflation (cosmology) , wage , econometrics , least squares function approximation , product (mathematics) , keynesian economics , labour economics , monetary policy , mathematics , statistics , physics , geometry , estimator , theoretical physics
This paper demonstrates how the labour and product markets interact in determining as outcome a generalized reduced‐form price Phillips curve. For the labour market we consider a wage Phillips curve and for the product market a price Phillips curve. We estimate separately the wage and price Phillips curves for the USA, using ordinary least squares, non‐parametric estimation and three‐stage least squares techniques. The finding is that wages are always more flexible than prices with respect to their respective demand pressure and that price inflation responds somewhat more to a medium‐run cost pressure than does wage inflation. The implications for macroeconomic stability are demonstrated. We also show—as a link between product and labour markets—that employment is related to output as Okun's law states. In comparing linear and non‐linear estimates of the wage and price Phillips curves we find furthermore that for some relationships non‐linearities are important while not for others. Although overall the non‐linear estimates tend to confirm our linear estimates, non‐linearities in some relationships of the Phillips curve are important as well.