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Real wages, real interest rates and the Phillips Curve: Evidence from Canadian data

Author

Listed:
  • Gentle, Paul F.

    (School of International Trade and Economics, University of International Business and Economics)

  • Paudel, Krishna P.

    (Department of Agricultural Economics and Agribusiness, Louisiana State University Baton Rouge)

  • Upadhyaya, Kamal P.

    (Department of Economics and Finance, University of New Haven)

Abstract

This article argues that any analysis of the Phillips Curve without the inclusion of real interest rate may generate a misleading result as any changes in the interest rate impacts the labor capital input mix in the production process, leading to a change in the level of employment in the economy. We justify this argument by developing an empirical model which includes the real interest rate as one of the explanatory variables in addition to inflation and real wages. The model is estimated using the annual data from Canada for the period 1960 to 2004. The estimated result indicates that interest rate variable is indeed significant in explaining the Phillips Curve. A likelihood ratio test conducted suggests that exclusion of real interest rate leads to a misspecification (omitted variable) problem.

Suggested Citation

  • Gentle, Paul F. & Paudel, Krishna P. & Upadhyaya, Kamal P., 2007. "Real wages, real interest rates and the Phillips Curve: Evidence from Canadian data," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 60(3), pages 319-331.
    • Handle: RePEc:ris:ecoint:0054
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    References listed on IDEAS

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    Cited by:

    1. Chen, Tao & Gentle, Paul F., 2011. "The Inflation-Unemployment Trade-off and the Significance of the Interest Rate: Some Evidence from United States Data from 1939 through 2007 - Il trade-off tra disoccupazione e inflazione e il ruolo d," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 64(2), pages 153-171.

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    More about this item

    Keywords

    Phillips Curve; aggregate supply Curve; Canada; short run; long run;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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