Working Paper: CEPR ID: DP2722
Authors: Charles Wyplosz
Abstract: The Paper looks for evidence of grease and sand effects in Europe, in particular the possibility that the natural rate of unemployment is affected by the inflation rate. Looking at four countries, France, Germany, the Netherlands and Switzerland, the Paper reports some preliminary evidence that the long-run rate of unemployment is a non-linear function of inflation. The particular shape of the empirical relationship supports the view that a moderate level of inflation provides some ?grease? to the price and wage setting process. In particular, the long-run rate of unemployment is found to reach a maximum of between 0.5% and 1%, and to decline quickly for higher rates of inflation. For the range of inflation rates observed in the sample countries, there is no evidence of sand effects, that uncertainty associated with inflation adversely affect the long-run rate of unemployment.
Keywords: inflation; natural rate of unemployment
JEL Codes: E30; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation (E31) | natural rate of unemployment (J64) |
| low inflation (E31) | natural rate of unemployment (J64) |
| high inflation (E31) | natural rate of unemployment (J64) |
| inflation (0.5% to 1%) (E31) | natural rate of unemployment (J64) |
| very low inflation (E31) | grease effect (F64) |
| high inflation (E31) | sand effect (Q54) |
| inflation (E31) | grease effect (F64) |
| inflation (E31) | sand effect (Q54) |