The inflation-unemployment trade-off: empirical considerations and a simple US-Euro Area comparison

Abstract

This paper uses recently developed robust estimation methods to empirically reassess the long-standing inflation-unemployment trade-off debate. Indeed, we study to what extent unemployment-based New Keynesian Phillips Curves are informative about the relationship between inflation dynamics and labour market conditions. In particular, we attempt to quantify the ‘elasticities’ of inflation with respect to unemployment of two economies, the US and the Euro Area, which are known to have markedly distinct labour market characteristics. We find that the relevance of the inflation-unemployment trade-off and its empirical adequacy is greatly enhanced once the informational content of key labour market variables is explored in our estimations.

Keywords

• Phillips curve
• Unemployment
• Model Averaging