Spanish unemployment and inflation persistence: are there Phillips trade-offs?

This paper studies the joint behaviour of inflation and unemployment in Spain over the period 1964-1995. We analyze the implications both of full hysleresi'i in unemployment and high inflation persistence for inference regarding dynamic Phillips trade-offs and sacrifice ratios in the Spanish economy in response to a demand shock. We organize our empirical approach as a structural but eclectic one. In doing so, we use a bivariate Structural V AR to identify demand and supply shocks. Our eclecticism comes from using three alternative just-identifying outlines, giving rise to alternative interpretations of the unemployment-inflation dynamics. Our results indicate that for a wide range of plausible identifying assumptions it is possible to identify a stable long-run Phillips trade-off. Nonetheless, augmenting the bivariate VAR with a third variable (public expenditure) to disentangling monetary from "non-monetary" shocks indicate that the trade-off may be transitory rather than permanent.

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