Short- and Long-Run Phillips Trade-Offs and the Cost of Disinflationary Policies

CEPR Discussion Paper Series #1483

Posted: 5 May 1997

See all articles by Juan Luis Vega-Croissier

Juan Luis Vega-Croissier

Europaische Zentralbank

Juan Jose Dolado

Universidad Carlos III de Madrid - Department of Economics; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute)

David Lopez-Salido

Board of Governors of the Federal Reserve System

Date Written: October 1996

Abstract

This paper studies the joint behavior of inflation and unemployment in Spain over the period 1964-95 in order to estimate dynamic Phillips trade-offs and sacrifice ratios in response to a demand shock. We organize our empirical approach as a structural (albeit eclectic) one. In so doing, we use a Structural VAR to identify demand shocks in a framework where the high persistence in both series allows us to differentiate between permanent and transitory components. Our eclecticism comes from using three alternative identifying schemes which fit the data equally well but place different emphasis on the effects of demand shocks on the unemployment rate. Our estimates suggest, according to the reader's prior belief (Keynesian or monetarist), that a one percentage point reduction in inflation following an aggregate demand contraction is associated with cumulated output losses of between 2.6% and 5% over five years.

JEL Classification: E12, E13, E24, C32

Suggested Citation

Vega-Croissier, Juan Luis and Dolado, Juan Jose and Lopez-Salido, David, Short- and Long-Run Phillips Trade-Offs and the Cost of Disinflationary Policies (October 1996). CEPR Discussion Paper Series #1483. Available at SSRN: https://ssrn.com/abstract=3931

Juan Luis Vega-Croissier (Contact Author)

Europaische Zentralbank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Juan Jose Dolado

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34 91 624 9300 (Phone)
+34 91 624 9313 (Fax)

HOME PAGE: http://www.eco.uc3m.es/english/staff/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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