Inflation-unemployment tradeoff and regional labor market data

We estimate a linear and a piecewise linear Phillips curve model with regional labor market data for West German and Neue L?nder. Employing regional observations allows us to country difference the data. This eliminates, under the assumption of homogeneous L?nder, supply shocks and changes in the formation of expectations as possible identification failures. With seemingly unrelated regressions we find a flat Phillips curve in the Neue L?nder. For the West German L?nder a piecewise linear model with a higher inflation-unemployment tradeoff for the regime of low unemployment rates fits the data very well. The results hold true if we control for endogeneity of the unemployment rate. With a kinked but upward sloping aggregate supply curve there seems to be room for stabilization policies, at least in the range of aggregate demand shifts that our data covers. First version received: December 2000/Final version accepted: Jan. 2002 RID="*" ID="*"  An earlier version of this paper was written while the second author was at Universidad Carlos III in Madrid. He thanks Juan Dolado and is grateful for financial support by the TMR Program on New Approaches for the Study of Economic Fluctuations. He would also like to thank Bertrand Koebel for his critique on that earlier version. Both authors are grateful to an editor and three anonymous referees for very helpful comments. Moreover, we wish to thank participants of the seminar on Quantitative Wirtschaftsforschung by Jürgen Wolters and Peter Kuhbier, Freie Universit?t Berlin. Finally we profited from discussions with participants at the conferences of the European Economic Association in Lausanne and the Verein für Socialpolitik in Magdeburg where the paper was presented. Of course, all errors are to our sole responsibility.