Trend, Cycle and Non-Linear Trade-Off in the Euro Area 1972-2001

46 Pages Posted: 27 Feb 2002

See all articles by Álvaro Aguiar

Álvaro Aguiar

University of Porto, CEMPRE, Faculdade de Economia

Manuel M. F. Martins

University of Porto, cef.up, Faculdade de Economia

Date Written: February 2002

Abstract

This paper presents new tests and estimates of the Phillips trade-off in the Euro Area, carried out in a unobserved components model with possibly non-linear Phillips and Okun relations, using quarterly aggregate data for the period 1970:I-2001:II. A concept of forward-looking near-rational expectations is introduced in the model, improving on the contradiction between rational expectations and evidence of inflation inertia. The Phillips curve turns out to be linear and its trade-off statistically significant, while non-linearity shows up in the Okun relation. The trend-cycle decompositions capture the main features of the Euro Area recent macroeconomic record.

Keywords: Trend and cycle, Unobserved-components, Kalman filter, Phillips curve, Okun law, Near-rational expectations

JEL Classification: E31, E32, C32

Suggested Citation

Aguiar, Álvaro and Mota Freitas Martins, Manuel, Trend, Cycle and Non-Linear Trade-Off in the Euro Area 1972-2001 (February 2002). Available at SSRN: https://ssrn.com/abstract=301544 or http://dx.doi.org/10.2139/ssrn.301544

Álvaro Aguiar

University of Porto, CEMPRE, Faculdade de Economia ( email )

4200-464 Porto
Portugal
+351225571254 (Phone)
+351225505050 (Fax)

Manuel Mota Freitas Martins (Contact Author)

University of Porto, cef.up, Faculdade de Economia ( email )

4200-464 Porto
Portugal

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