Aggregation and Euro Area Phillips Curves

33 Pages Posted: 19 May 2003

Date Written: February 2003

Abstract

This paper examines the issue of the impact of aggregation in the empirical analysis of euro area labour markets. A Phillips Curve describing the adjustment of unit labour costs is estimated at the national and aggregate level for the 5 largest euro area countries. Potential sources of aggregation bias are investigated - such as differences in parameter coefficients and a lack of correlation in the independent variables across countries - as well as the potentially offsetting statistical averaging effect. Finally the out-of-sample forecasting performance of both approaches is evaluated. The results point to some limited advantages of analysing wage developments at the national rather than at the area-wide level. The paper concludes that if major advantages in undertaking national analysis do exist, they are likely to arise from the ability to develop country-specific structures for the Phillips Curves and not from aggregation biases that emerge when a common structure is used.

Keywords: Euro area; Phillips curve; wage growth

JEL Classification: C52, C53, E24, J30

Suggested Citation

Fabiani, Silvia and Morgan, Julian Benedict, Aggregation and Euro Area Phillips Curves (February 2003). ECB Working Paper No. 213. Available at SSRN: https://ssrn.com/abstract=387701

Silvia Fabiani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Julian Benedict Morgan (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

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