Eurozoneconomics: less inflation and more unemployment (Phillips Curve for dummies)

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Eurozone-Having previously made reference to Frenkel’s Cycle to illustrate the Greek crisis (The economic rise and fall of Greece), hereafter I re-elaborate the findings of an analysis I originally included in my book ABC Economipedia which investigates the inverse relationship between inflation and unemployment rates within the Eurozone since the introduction of the single currency in 2002. In heterodox economics this inverse relationship is often referred to as “the Phillips curve”.

The curve was originally formulated by A.W.H. Phillips following his breakthrough study of wage inflation and unemployment in the United Kingdom from 1861 to 1957 which found a consistent inverse relationship: when unemployment was high, wages increased slowly; when unemployment was low, wages rose rapidly.

 

 Phillips Italoeuropeo IMG1

 

 

 

The close fit between the estimated curve and the data encouraged many economists to substitute wage variation with inflation rate and to use the Phillips curve as a sort of menu of policy options e.g. with an unemployment rate of 6 percent, the government might stimulate the economy to lower unemployment to 5 percent.

 

At the height of the Phillips curve’s popularity, Edmund Phelps and Milton Friedman independently challenged its theoretical underpinnings by asserting that the Phillips Curve was only applicable in the short-run and that in the long term inflationary policies will not decrease unemployment. Notwithstanding Phelps and Friedman’s critique to Phillips, when assessing the state of the Eurozone economy I found evidence that the original formulation of the Phillips curve is actually still relevant in the long-run.

 

My analysis concludes that:

1. Within the Eurozone there is an inverse relationship between rates of unemployment and corresponding rates of inflation for the 2002-2014 period. 2. Germany is the sole the “core” Member-States where inflation outpaced unemployment whilst everywhere else within the Eurozone unemployment grew faster rather than inflation 3.

 

In the countries at the periphery of the Eurozone, i.e. those which have been most affected by the so- called sovereign debt crisis, there is a greater spread between the rise in unemployment and a fall in inflation rates.

 

 Phillips Italoeuropeo IMG2

 


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THE ECONOMIC RISE AND FALL OF GREECE (THE FRENKEL CYCLE FOR DUMMIES)

London- As some readers many know, in recent weeks I tried to avoid sharing my views on the Greek crisis. For a number of reasons. ...[here]

 

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