Working Paper: NBER ID: w1377
Authors: Ray C. Fair
Abstract: Three models of price and wage behavior are estimated and tested in this paper. Model 1 is one in which the long-run trade-off between unemployment and inflation is in terms of price levels; Model 2 is one in which the trade-off is in terms of rates of change; and Model 3 is one in which there is no long-run trade-off. The evidence favors Model 1 over Models 2 and 3. The comparison between Models 2 and 3 is inconclusive. The short-run trade-offs are greater for Model 1 than for Models 2 and 3. The fact that Model 3 did not do particularly well is evidence against the Friedman-Phelps proposition of no long-run trade-off.
Keywords: unemployment; inflation; macroeconomics; tradeoff; econometric models
JEL Codes: E31; E32; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unemployment rate (J64) | price level (E30) |
| unemployment rate (J64) | wage level (J31) |
| unemployment rate (J64) | rate of change of price level (E31) |
| unemployment rate (J64) | nominal wage (J31) |
| unemployment rate (J64) | real wage (J31) |