Arbeitspapier
The New Keynesian Model and the Long-run Vertical Phillips Curve: Does it hold for Germany?
New-Keynesian macroeconomic models typically assume that any long-run trade-off between inflation and unemployment is ruled out. While this appears to be a reasonable characterization of the US economy, it is less clear that the natural rate hypothesis necessarily holds in a European country like Germany where hysteretic effects may invalidate it. Inspired by the framework developed by Farmer (2000) and Beyer and Farmer (2002), we investigate the long-run relationships between the interest rate, unemployment and inflation in West Germany from the early 1960s up to 2004 using a multivariate co-integration analysis technique. The results point to a structural break in the late 1970s. In the later time period we find for west Germany data a strong negative correlation between the trend components of inflation and unemployment. We show that this finding contradicts the natural rate hypothesis, introduce a version of the New Keynesian model which allows for some hysteresis and compare the effectiveness of monetary policy in these two models. In general, a policy rule with an aggressive response to a rise in unemployment performs better in a model with hysteretic characteristics than in a model without.
- Language
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Englisch
- Bibliographic citation
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Series: DEP (Socioeconomics) Discussion Papers - Macroeconomics and Finance Series ; No. 1/2006
- Classification
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Wirtschaft
History of Economic Thought: Macroeconomics
Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- Subject
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Cointegration
Vector error Correction Model
Unemployment
Phillips Curve
Hysteresis
- Event
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Geistige Schöpfung
- (who)
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Fritsche, Ulrich
Gottschalk, Jan
- Event
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Veröffentlichung
- (who)
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Hamburg University, Department Economics and Politics
- (where)
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Hamburg
- (when)
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2006
- Handle
- Last update
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10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Fritsche, Ulrich
- Gottschalk, Jan
- Hamburg University, Department Economics and Politics
Time of origin
- 2006