Macroeconomic Implications of Near Rational Behavior: An Application to the Italian Phillips Curve

Abstract:     
New-Keynesian macroeconomic models typically conclude that long-run unemployment gravitates around the NAIRU, regardless of the nominal inflation rate. Contrastingly, the model of Akerlof, Dickens and Perry (2000) (ADP) predicts that excessively low inflation may result in a situation where unemployment is high relative to the social optimum. This paper investigates whether ADP-type short- and long-run Phillips Curves may suit the Italian economy. Firstly we estimated a short-run non-accelerationist Phillips curve (i.e. where the expected inflation coefficient depends on inflation and it is generally less than unit) on Italian post-war data. Based on these results, we then simulated the long-run Phillips Curve and ran robustness checks by using a rival cointegration approach. We have two main results. First, the Italian short-run Phillips curve is actually non-accelerationist. Second, our estimates indicate that in Italy a long-run trade-off between inflation and unemployment cannot be ruled out at low and moderate inflation rates.

Number of Pages in PDF File: 38

Keywords: Near-rationality, Non-accelerationist Phillips Curve, Natural Rate of Unemployment

JEL Classification: E24, E31, J41

working papers series