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Trend, cycle, and non-linear trade-off in the Euro Area 1970-2001

Author

Listed:
  • Alvaro Aguiar

    (CEMPRE, Faculdade de Economia da Universidade do Porto)

  • Manuel M. F. Martins

    (CEMPRE, Faculdade de Economia da Universidade do Porto)

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.

Suggested Citation

  • Alvaro Aguiar & Manuel M. F. Martins, 2003. "Trend, cycle, and non-linear trade-off in the Euro Area 1970-2001," FEP Working Papers 122, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:122
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    File URL: http://www.fep.up.pt/investigacao/workingpapers/wp122.pdf
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    References listed on IDEAS

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    Cited by:

    1. Willi SEMMLER & Wenlang ZHANG, 2010. "Monetary Policy Rules with Nonlinear Philips Curve and Endogenous Nairu," EcoMod2004 330600128, EcoMod.
    2. Ana Paula Delgado & Isabel Maria Godinho, 2004. "The evolution of city size distribution in Portugal: 1864-2001," FEP Working Papers 151, Universidade do Porto, Faculdade de Economia do Porto.
    3. Sandra Silva, 2009. "On evolutionary technological change and economic growth: Lakatos as a starting point for appraisal," Journal of Evolutionary Economics, Springer, vol. 19(1), pages 111-135, February.
    4. Maria do Rosario Correia & Scott C. Linn & Andrew Marshall, 2004. "An Empirical Investigation of Debt Contract Design: The Determinants of the Choice of Debt Terms in Eurobond Issues," FEP Working Papers 148, Universidade do Porto, Faculdade de Economia do Porto.

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    More about this item

    Keywords

    Trend and cycle; Unobserved-components; Kalman filter; Phillips curve; Okun law; Near-rational expectations.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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