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Cambridge Journal of Economics Advance Access originally published online on June 17, 2008
Cambridge Journal of Economics 2009 33(1):95-112; doi:10.1093/cje/ben018
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© The Author 2008. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

A Phillips curve interpretation of error-correction models of the wage and price dynamics

Søren Harck*

* University of Aarhus, Denmark

Address for correspondence: Aarhus School of Business, University of Aarhus, Department of Economics, Prismet, Silkeborgvej 27, 8000 Aarhus C, Denmark; email: soh{at}asb.dk

This paper presents a model of employment, distribution and inflation in which a modern error correction specification of the nominal wage and price dynamics (referring to claims on income by workers and firms) occupies a prominent role. It is brought out, explicitly, how this rather typical error-correction setting, which actually seems to capture the wage and price dynamics of many large-scale econometric models quite well, is fully compatible with the notion of an old-fashioned Phillips curve with finite slope. It is shown how the steady-state impact of various shocks to the model can be profitably conceived of and interpreted in terms of (and to some extent even calculated by means of) this long-run Phillips curve.

Key Words: Employment • Wage share • Inflation • Phillips curve • Error correction

JEL classifications: E12, E24, E25, E31

Manuscript received September 25, 2006; final version received February 4, 2008.


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