Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/211924
Authors: 
Paloviita, Maritta
Year of Publication: 
2002
Series/Report no.: 
Bank of Finland Discussion Papers No. 20/2002
Abstract: 
This paper assesses empirically the two main alternative specifications of the output gap-based Phillips relation for the euro area: the older expectations-augmented Phillips curve and the new Keynesian Phillips curve.The main focus is on the role of expectations and comparison of the two theories.Instead of imposing rational expectations, an alternative and in principle less restrictive approach is applied to operationalising expectations.Direct measures of inflation expectations, ie OECD forecasts, are used as empirical proxies of economic agents' inflation expectations.The main interest is in the euro area as a whole, although potential heterogeneity of inflation dynamics is also examined across eleven EMU countries.According to the results, inflation expectations are central to the inflation process in all euro area countries.The paper finds evidence that the new Keynesian Phillips curve fits the euro area data slightly better than the expectations-augmented Phillips curve.Research on expectations formation would be an important complement to the present study.
Subjects: 
Phillips curve
expectations
euro area
JEL: 
E31
C52
Persistent Identifier of the first edition: 
ISBN: 
952-462-003-0
Document Type: 
Working Paper

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