A traditional nominal wage Phillips curve: theory and evidence

Abstract

By combining simple contracting schemes with firms’ optimisa-tion, we provide theoretical underpinnings to the traditionalnominal wage Phillips curve. The parameters of our Phillips curvehave a structural interpretation. We extend the model to include theeffect of the labour share, a factor that is absent in the newKeynesian model. Empirically we find that the unemploymentparameter of the traditional model is significant, and that of theforward-looking model is wrongly signed. Furthermore, evidencesuggests that inflation targeting was accompanied by the flatteningof the curve, increased anchoring of inflation expectations and adecline in worker power.