Abstract:
This paper summarises the main features of an expectations-augmented
Phillips curve with accompanying mark-up price equations. The empirical
counterparts for six countries are presented. Even though preliminary, the
results are relatively satisfactory in terms of statistical fit and a priori
expectations with respect to the sign and size of the parameters. However, in
periods when both inflation and unemployment have increased far above
historical trends, it is somewhat unsatisfactory to assume that the level of
unemployment is exogenous and independent of the inflation process. Moreover,
considering the simultaneous changes in relative prices and real wages, there
would seem to be some merit in incorporating these variables directly
and indirectly in the wage formation process.