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Low‐inflation Targeting and Long‐run Unemployment

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  • Per Lundborg
  • Hans Sacklén

Abstract

The model of Akerlof, Dickens and Perry (2000) (ADP) predicts that low inflation may cause unemployment to persist at high levels. When applied to U.S. data, their results strongly rejected the conventional NAIRU model. We apply the ADP model to Swedish data. The fact that our Swedish data also reject the NAIRU model has a number of interesting implications for the Swedish economy and, potentially, for other European countries as well. The results indicate that raising the Swedish inflation target from 2 to 4 percent would bring long‐run unemployment down by several percentage points. The possibility of ADP‐type long‐run Phillips curves also across the euro countries may raise some concern about the EMU project. While detailed studies on other countries are needed, there is nothing to suggest that these non‐vertical Phillips curves would not differ considerably across the euro countries. Any single inflation level targeted by the ECB would then generate excess unemployment in individual member states.

Suggested Citation

  • Per Lundborg & Hans Sacklén, 2006. "Low‐inflation Targeting and Long‐run Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(3), pages 397-418, October.
    • Handle: RePEc:bla:scandj:v:108:y:2006:i:3:p:397-418
    DOI: 10.1111/j.1467-9442.2006.00464.x
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    References listed on IDEAS

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    1. Lundborg, Per & Sacklén, Hans, 2003. "Low-Inflation Targeting and Unemployment Persistence," Working Paper Series 188, Trade Union Institute for Economic Research.
    2. Wyplosz, Charles, 2001. "Do We Know How Low Inflation Should Be?," CEPR Discussion Papers 2722, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Mallick, Debdulal, 2019. "Policy regimes and the shape of the Phillips curve in Australia," Journal of Policy Modeling, Elsevier, vol. 41(6), pages 1077-1094.
    2. Stefano, Fasani, 2016. "Long-run Unemployment and Macroeconomic Volatility," Working Papers 352, University of Milano-Bicocca, Department of Economics, revised 18 Oct 2016.
    3. Ho-Chuan Huang & Chih-Chuan Yeh, 2014. "Inflation targeting on unemployment rates: a quantile treatment effect approach," Applied Economics Letters, Taylor & Francis Journals, vol. 21(7), pages 453-458, May.
    4. Jean Louis, Rosmy & Balli, Faruk, 2013. "Low-inflation-targeting monetary policy and differential unemployment rate: Is monetary policy to be blamed for the financial crisis? — Evidence from major OECD countries," Economic Modelling, Elsevier, vol. 30(C), pages 546-564.
    5. Erixon, Lennart, 2011. "Under the influence of traumatic events, new ideas, economic experts and the ICT revolution - the economic policy and macroeconomic performance of Sweden in the 1990s and 2000s," Research Papers in Economics 2011:25, Stockholm University, Department of Economics.
    6. Lumengo Bonga-Bonga & Ntsakeseni Letitia Lebese, 2019. "Rethinking The Current Inflation Target Range In South Africa," Journal of Developing Areas, Tennessee State University, College of Business, vol. 53(2), pages 13-27, April-Jun.
    7. Lars E. O. Svensson, 2015. "The Possible Unemployment Cost of Average Inflation below a Credible Target," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 258-296, January.
    8. Andrea Vaona, 2015. "Anomalous empirical evidence on money long-run super-neutrality and the vertical long-run Phillips curve," Working Papers 17/2015, University of Verona, Department of Economics.
    9. Mallick, Debdulal, 2014. "A Spectral Representation of the Phillips Curve in Australia," MPRA Paper 59794, University Library of Munich, Germany.
    10. Lennart Erixon, 2015. "Can fiscal austerity be expansionary in present-day Europe? The lessons from Sweden," Review of Keynesian Economics, Edward Elgar Publishing, vol. 3(4), pages 567—601-5, October.
    11. Nasir, Muhammad Ali & Huynh, Toan Luu Duc & Yarovaya, Larisa, 2020. "Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: Evidence from three Nordic Kingdoms," International Review of Financial Analysis, Elsevier, vol. 72(C).

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