Unemployment and inflation persistence in Spain: Are there Phillips trade-offs? |
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Authors: | Juan J Dolado J David López-Salido Juan L Vega |
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Institution: | Departamento de Economía, Universidad Carlos III de Madrid, c/ Madrid 126, 28903 Getafe (Madrid), Spain (e-mail: dolado@eco.uc3m.es), ES Research Departament, Banco de Espa na, c/ Alcalá 50, 28014 Madrid, Spain (e-mail: davidl@bde.es), ES Research Department, European Central Bank, Kaisserstra?e 29, 60311 Frankfurt, Germany (e-mail: juan_luis.vega@ecb.int), DE
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Abstract: | This paper studies the dynamic behavior of inflation and unemployment in Spain during the period 1964–1997. In particular,
we analyze the implications of high persistence in both unemployment and inflation dynamics for inference regarding the size
of Phillips trade-offs and sacrifice ratios in the Spanish economy, in response to a demand shock. To do so we use a Stuctural
VAR approach with several identification outlines which give rise to alternative interpretations of the joint unemployment-inflation
dynamics. When using a bivariate VAR we cannot reject the existence of a permanent output loss of one-half of one percentage
point for each percentage point of permanent disinflation. However, when the VAR is augmented with a third variable, in order
to disentangle monetary from non-monetary shocks within the demand class, the evidence favours a lower and marginally permanent
trade-off with an output loss of about one-fourth of one percentage point. |
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Keywords: | JEL classification: E12 E13 E24 C32 |
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