Low Inflation Targeting Raises Long-Term Unemployment

Low-Inflation Targeting and Long-Run Unemployment Author(s): Per Lundborg and Hans Sackln Source: The Scandinavian Journal
of Economics, Vol. 108, No. 3 (Sep., 2006), pp. 397-418 Published by: Wiley on behalf of The Scandinavian Journal of Economics Stable URL: http://www.jstor.org/stable/4121606 . Accessed: 01/10/2013 03:27
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Scand.J of Economics108(3), 397-418, 2006 DOI: 10.1111/j.1467-9442.2006.00464.x
Low-inflation Targeting and Long-run Unemployment*

Per Lundborg
SwedishInstitute for Social Research,StockholmUniversity, SE-106 91 Stockholm,Sweden per.lundborg@sofi.su.se
Hans Sacklin
SwedishInstitute for Social Research,StockholmUniversity, SE-106 91 Stockholm,Sweden hans.sacklen@sofi.su.se
Abstract
The model of Akerlof, Dickens and Perry (2000) (ADP) predictsthat low inflationmay cause unemployment to persistat high levels. Whenappliedto U.S. data,theirresultsstrongly NAIRUmodel. We applythe ADP modelto Swedishdata.The fact rejectedthe conventional that our Swedishdataalso rejectthe NAIRUmodel has a numberof interesting implications for the Swedisheconomyand, potentially, countriesas well. The results for other European indicate that raising the Swedish inflation target from 2 to 4 percent would bring longrun unemployment downby severalpercentage points.The possibilityof ADP-typelong-run Phillipscurvesalso acrossthe eurocountries mayraisesome concernaboutthe EMUproject. While detailedstudieson other countriesare needed,there is nothingto suggest that these non-verticalPhillips curves would not differ considerably across the euro countries.Any in single inflation level targetedby the ECB would then generateexcess unemployment individual memberstates. Keywords: Phillipscurve;efficiency wages; near-rationality JEL classification: E24; E3 1; J41
I. Introduction
Followinga wave of heavyanti-inflationary policies duringthe last decades, inflationtargeting has now becomethe leadingprincipleof monetary policy in many Europeaneconomies. In the euro area, the UK and Sweden, the targetsare set to 2 percentor less. In a historicalperspectivesuch inflation
* We are refereesfor very detailedcommentsand to GeorgeA. gratefulto two anonymous Akerloffor discussionson an earlyversion.We havebenefitedfromcommentsby Lawrence at the workshop"ThePhillipsCurve:New Theory Ball, MikaelApel and otherparticipants andEvidence" in Stockholm, usefulcommentsfromseminar May2002. We also acknowledge at the TradeUnion Institutefor EconomicsResearch(FIEF),the Institutefor participants International EconomicStudies,the Riksbank, the EconomicCouncil,StockholmUniversity andGrteborg The research has been financedby a grantfromthe SwedishCouncil University. for Working Life and Social Research.
9600 Garsington Journalof Economics 2006. Published Road, Publishing, by Blackwell ? The editorsof the Scandinavian OX4 2DQ, UK and 350 MainStreet,Malden,MA 02148, USA. Oxford,
398 P Lundborgand H. Sacklen
rates are strikinglylow; no OECD countryhas experiencedinflationbelow 2 percentfor any extendedperiod after WorldWar II and up to the 1990s. The widespread of low-inflation targetssuggestsa strong implementation commitment to the idea of a verticallong-runPhillipscurve. Accordingto this view, inflationhas no long-runeffects on unemployment, implyingthat low unemployment in principlecould coexist with low rates of inflation. in sustained as in the period 1955However, periodsof low unemployment, the 2 1968, inflationhas been considerably higherthan percent.' Moreover, characterized by high, periodof low inflationsince the early 1990s has been to researchers or very high,jobless rates.Such observations have prompted questionthe verticalPhillips curve. trade-offraises The possibility of a long-run unemployment-inflation to several intriguingquestions.Ratherthan attributing high unemployment shifts in the verticalPhillipscurve,a trade-offwould implythatheavy antito persist at high inflationarypolicies might have caused unemployment levels. This, of course, shouldbe of special concernto countriesaiming at very low inflation.If a trade-offexists, there shouldalso be some concern about the viability of the EMU project.Since there is nothingto suggest thatthe trade-offis identicalacrossmembercountries,how shouldan inflaGiven that membership tion targetfor the whole euro areabe determined? implies a common (and low) inflationrate, could a countryobtain more outside the union by opting for a country-specific outputand employment inflationtarget? wisdom A numberof empiricalstudieshave challengedthe conventional several studies that the long-runPhillips curve is vertical. In particular, have found adverselong-runeffects of low inflation.For example,Bullard and Keating(1995) reporteda negative long-runresponse of outputto a reductionin inflationin European countrieswith low inflation.Studieson the U.S. by King and Watson(1994) and Fair (2000) suggest a long-run trade-off. unemployment-inflation has providedmicroeconomic In addition,a growingtheoreticalliterature and inflationat low inflarationalesfor a trade-offbetweenunemployment tion rates.One categoryof models buildson the existenceof nominalwage rigidity.Using a wage-bargaining approach,Akerlof, Dickens and Perry on the of low inflationon real-wageflexibility adverse effects (1996) rely as discussedby Schultze(1959), Samuelsonand Solow (1960) and Tobin (1972). If the inflationrate falls from, say, 3 to 0 percent,some firms in stochasticsteadystatecannotreducethe nominalwage andarethusexposed
was around in the 19 OECDcountries Duringthe period1955-1968, averageunemployment 2 percentand averageinflationaround4 percent,i.e., substantially higherthan the present targets. O The editors of
the Scandinavian Journal of Economics 2006.
Low-inflationtargeting and long-run unemployment 399
to a real-wageshock that causes unemployment to rise. Holden(2004) constructsa bargaining in many European model based on legal requirements countriesthat nominalwage contractscan only be changedby mutualconsent, therebygiving workersa stronger positionat low inflation. bargaining The key implicationof both models is a long-runtrade-offbetweenunemploymentand inflationat low inflationrates. Akerlofet al. (1996) applied their model to U.S. data, and later Djoudadand Sargent(1997) and Fortin data. Dickens (2001) included (2001) presentedresultsbased on Canadian the same mechanismfor a set of European countries.All these studiesrevertical Phillips curve in favor of the idea that wage ject the traditional rigidityyields a negativelysloped Phillips curve at low inflation. Anotherapproach relies on near-rationality, i.e., thatundercertaincondiMore tions agentsmay deviatefromprofit- or utility-maximizing behavior. than 30 years ago, Ecksteinand Brinner(1972) had alreadynoted that in the U.S., wage- and price-setters partiallyignoredinflationduringyears of low inflation.Buildingon this idea, and referringto extensivesociological andpsychologicalevidence,Akerlof,Dickensand Perry(2000) (henceforth ADP) set up an efficiency wage model in which agents' behaviorchanges as the economyshifts betweenhigh- and low-inflationregimes.If inflation is disregarded at low rates, the firm sets a lower wage and a lower price can be relativeto nominalaggregatedemand.As a result, unemployment sustainedat lower levels than if inflationwere fully accountedfor. When tested on U.S. data,the standard Phillipsrelationis rejectedin favorof the near-rationality hypothesis.2 imThe Phillipscurve impliedby the ADP model has severalimportant plications.Above all, the model identifies an inflationrate that minimizes long-rununemployment. Departuresfrom this rate could potentiallygive rise to largecosts in termsof unemployment. This featuremakesthe model where inflationis now for a like Sweden, particularly interesting country has traditionat a low level and where full (2 percent) targeted employment ADP model been the estimated For this we reason, ally given high priority. on Swedish quarterly data to examine whethera differentinflationtarget would reducelong-rununemployment. Ourpreferred regressions(basedon data on inflation show that, by raising the inflation survey expectations) from would go down 2 to 4 around target percent,long-rununemployment from 4-5 percentto about2-3 percent. for not takIn the next sectionwe begin by considering agents'rationales model. ADP low the inflation basic outline into account. We then ing fully in Section III, The econometricspecificationsand our data are introduced
2 See
also Fortin(2001) and Dickens (2001) for some mixed empiricalresults for Canada and a numberof European countries,respectively.
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400 P Lundborg and H. Sacklen which also containsthe empiricalresults. In the final section we discuss the policy implicationsof our findings.
II. Near-rationalityand the Phillips Curve

Why Inflation is Disregarded at Low Rates The ADP model recognizes that, during high inflation, all firms behave rationallyby taking inflationfully into accountwhen they set wages and prices. However,a special featureof the model is that some firms tend to inflationwhen it is low and hence behavenear-rationally. disregard would firms disregardlow inflation?ADP offer numerousarguWhy ments (see ADP,pp. 4-10, for a comprehensive survey),among which the Firmsface so-calledediting argument the most fundamental. is presumably a myriadof everydaydecisions concerningproductdesign, whom to emto cost reductions,etc., that are all of some importance ploy, investments, that have In factors such to firms tend profits. ignore complex situations, little effect on profits.ADP show convincingly thatlosses fromdisregarding inflationin wage- and price-settingactuallybecome negligible at low inas a variable flationrates.Hence, low-level inflationmay simply disappear of relevanceto profits.3 behavior? Is thereany empiricalsupportfor the existenceof near-rational ADP presenta range of such evidence for the U.S. For instance,the importanceof inflationexpectationsin determining wages seems to depend on the inflationrate. ADP show that the magnitudeof the coefficient on expected inflation depends crucially on the level of inflation. Periodsof high inflationtend to yield coefficients aroundone, while periods of low inflationtend to yield estimatedcoefficientsbetween0 and 0.5.4 ADP developtheirarguments in an efficiency-wageframework, implying of the thatfirms set wages unilaterally. This may be an adequate description wherecollectivebargainmarkets but less so of European U.S. labormarket, ing dominates.However,any economycontainselementsof both unilateral When applyingthe ADP model to our wage-settingand wage bargaining. Swedishquarterly datawe implicitlyassumethatfirms haveenoughlatitude for efficiency wage-setting.Studies by Agell and Lundborg (1995, 2003)
3 At some low level, inflationmay be perceivedas price stability. Or, as arguedin Blinder, definitionof price stabilityis inflationso Canetti,Lebow and Rudd (1998), "a prominent low that it ceases to be a factorin influencingdecisions". 4 A consequenceof disregarding of nominal inflationwould be a more frequentoccurrence Thatnominalcontractsare more commonat low inflationis consistentwith price contracts. existing evidence(see ADP,fn. 9).
have also shownthat even for a typical bargaining economyas in Sweden, firms' wage-settingis affectedby efficiency wage considerations.5 The ADP Model6 At any point in time, firms maybehaveeitherrationally (indexedr) or nearRational inflation know their firms workers' expectations rationally(nr). and incorporate these in wage-setting.For reasonsdiscussed above, nearrationalfirms neglect to incorporateinflationwhen it is low. Whethera firm behavesrationally or near-rationally is not exogenouslygiven but will be determined by the rate of inflation. Firms set efficiency wages that minimize labor cost per expected efficiency unit, wj/e<. Let the effort that a firm of typej= r, nr expects from its employeesbe a functionof the wage, wj, relativeto an expectedreference wage, w~R, and expectedunemployment, ue. Firmspaying wj expect the effort level
ee
j
= -A + B ) + Cue, 'j i (wj/weR
(1)
where a is a constantin the zero to unity interval.A, B and C are all positive constants. Firms set wages for the next periodafterhavingprojectedthe effects of inflationon the referencewage of their workers.This expected reference the wage that a firm shouldpay and is specified as: wage, w R, determines
weR =
nr
where i-v1 is last period's average wage and 7r is expected consumer price inflation.Minimizingwj/ej implies that the Solow conditionwill be satisfied,i.e., thatthe elasticityof expectedeffort with respectto the wage rate equals unity. Solving for the wage we obtain7
e
1-l(l +1 = -1 wr _le -
(2a)
7"e)
(2b)
A
Wi
Cue 1/a
B(1- a)
model s See also Chen and Edin (2002). A referee has suggestedto us that a bargaining could also be specified so as to yield the same sort of Phillips curve as derivedby ADP. This could be exploredin futureresearch.
6Themodelin thissection a et al. (2000),whichcontains buildson the modelin Akerlof muchmoredetailed exposition. form actualreference as wR = _l( + 7re),i.e., all workers wageis specified 7Workers'
want theirreferencewage on the basis of last period'saveragewage. In addition,all workers
is abovezero,the If inflation full compensation for expected in consumer inflation prices.
in it. Theeffortlevelsupplied near-rational firmsunderestimate by workers wagewhereas in for firmtype can be found and (1). w1 substituting using (3) by j, ej, w.jR
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decisionon workers'truereference is thatrationalfirms base theirwage-setting implication
402 P Lundborg and H. Sacklkn firms thatdivide The economyconsistsof n monopolistically competitive total aggregatedemand among them accordingto the relative prices of theirrespectivegoods. The first-order conditionof the profit-maximization that the firm's problemimplies price is determinedas a markupon the unit labor cost. That is, pj = (//(0 - 1))(wj/ej), where expected efficiency is the of demand. price elasticity / It can easily be shown that near-rationality causes a relativedecreasein low inflation are ADP demonstrate that losses from profits. disregarding rates as high as 5 2 inflation below at and even negligible percent possibly will or losses the more. As inflation increases,however, eventually percent become substantial; see ADP, pp. 15-16. In line with our earlierreasonfirms wouldtherefore be expectedto become increasingly ing, near-rational awareof forgoneprofits as inflationincreases.Assumingthat this "tolerance" towardslosses differs across firms, it then follows that more and more firms would switchto fully rationalbehavior. When inflationreaches a sufficientlyhigh level, all firms incorporate inflationin wage- and pricesetting,and we are back in a world of fully rationalagents. In the ADP model, the abovemechanismis specified in termsof threshold levels for losses inducedby near-rational behaviorrelativeto profits underfull rationality. Once the relativeloss reachesthis thresholdlevel, the firm switches from near-rational to fully rationalbehavior,or vice versa. of these thresholds,the fractionof priceAssuminga normaldistribution setters who behave near-rationally will vary with the rate of inflation,7r. In the following we denote this fractionby 4(.), where 1 is the standard cumulative normaldistribution. Calculatingthe averageprice level at time t as a weighted averageof firms, the short-run price Phillips prices set by rationaland near-rational curve is given by [1 (4) A Cul A - Cu = (1-)/ ], (4) [I + + Cue (I 7r,) B(1 ca)t (A (1)t(.)7 t-) A where ue_, is expectedunemployment at the startof t- 1.8
III. The Swedish Long-run Phillips Curve

The Lowest Sustainable UnemploymentRate of Inflation (LSURI) of both sides of the short-run Phillipsrelationin By takingthe logarithms ADP as and the same (p. 16), we get equation(4), approximations making
8
use (3), (2a) and (2b) in (1). The resultingexpressionis expressionsfor pr,t and Pnr,t, wel,(.)pp,, then used, along with (3), in the price equationspj,t = (01/( - 1))(wj,t/ee,t).
?
The average price level is p, =
+ [1 -
,(-)]Pn,,,t and 1 +7r, = Pt/Pt-I.
To obtain

7r = d -
aut
+ Dt(?.)7r +7Aut.
(5)
The long-runsteady-state by equalitybePhillips relationis characterized tween actual and expected inflation and by a constant(and known) unemploymentrate. Imposing these restrictions,the Phillips relation in (5) reducesto
u = (d/a) - [1 - t(-)]Wr/a. (6)
The standard, fully vertical long-runPhillips curve, which implies that rate,is derivedunderthe assumpunemployment alwaysequalsa "natural" tion of full rationality. we may note from By allowing for near-rationality, (6) thatthis long-runPhillipscurve will, in general,not be vertical.Hence, the conventional is less relerate of unemployment concept of a "natural" vant for the ADP model; in the followingwe let the natural ratedenotethe This level of unemployment that obtainswhen all firms behaverationally. special case of (6) occursif inflationis sufficientlyhigh such that4(.)= 1. From (6), the naturalrate is given by u"= d/a. Since disregarding zero inflation is equivalentto fully rationalbehavior, the naturalrate also obtains at 7r=0. As inflation increases above firms opt for a wage that is lower than the zero, however,near-rational wage set by fully rationalfirms. As this implies a lower average wage comparedto the wage in an economy where all firms always behave will be lowerthanthe naturalrate.Consequently, rationally, unemployment the long-runPhillipscurvehas a negativelysloped segmentat low inflation rates. As inflationrises, there are two opposing forces at work. While nearrationalfirms disregardmore inflation,which tends to furtherreduce unemployment,it also becomes increasinglycostly for firms to behave this and hence set way.Moreandmore firms thereforeswitchto full rationality, at some Eventually, higherwages, which tends to increaseunemployment. inflation rate, the share of rationalfirms has increasedto such an extent that unemployment actuallystartsto increase.This process continuesuntil inflation has reachedthe level at which all firms have switched to fully is rationalbehavior.At this level of inflation and above, unemployment at its natural rate. again Thus, the model yields the hump-shaped long-run Phillips curve that ADP show in their Figure 1. This shape has several interestingimplications. Most importantly, there exists a lowest sustainableunemployment rate of inflation (LSURI), yielding the lowest sustainableunemployment =0 rate (LSUR). Formally, the LSURI is the inflationrate where u/o"ir in (6).
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404 P Lundborgand H. Sacklin
Empirical Specifications and Data In order to proceed towardsan empiricalspecification,we returnto the short-run Phillipsrelationin equation(5). In line with ADP,we approximate function by the argumentin the standardnormal cumulativedistribution the effects of past D + Eir2, whereD and E are parameters. represents inflationon the likelihoodthat people act"iL rationallytowardinflation.The Phillips curve that we estimatethen becomes:
(7) + kXt+ Et, \+(D + Eir rt = d + alu + a2ue_-1 .t)rte X a vectorof dummyvariables whered, D, E, a1, a2 and k are parameters, and e an errorterm. We proxy I7Lby severaldifferentspecificationssuggestedby ADP. One is a geometricallydecliningweightedmoving averageof past inflationin consumerprices:
=L
in which 6 is estimated.An alternative specificationis (9) EI=1(1 - iA)rti (1- iAiA) L,t= ) E =1(I where A is estimated,i indexes quartersand I is set to 16 quarters.In addition to these formulations,we also apply the following weighting procedure:
I
,t
(1 - 6)7fLt-1
6Ft-l,
(8)
rL=
,t
i=1
gii-i
(10)
in which the weights gi are estimated(0 <gi < 1 and Egi = 1) and the in To reduce the numberof parameters lag length I is set to 16 quarters. the weightsto be identicalwithin we simplify(10) by restricting estimation each year. method has To control for inflation expectations,7re, the predominant been to apply some adaptiveexpectationsscheme. Like ADP,we first foland applied(8)-(10) also for this variable. lowed this estimationprocedure We also ran regressionsallowingthe weights in (10) to differ across quarto have an interestingset of survey data ters. In addition,we are fortunate that we could utilize. on households'inflationexpectations In determiningexpected unemployment, ue, we set the lag length to eithertwo or 12 periods.We began by runningregressionson open unemmeasuresof ployment,but later variedthese to include severalalternative unemployment. The relevant price inflation index for the dependentvariable is one that measures prices of goods produced domestically and consumed
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For a large economy like the U.S. (for which ADP estimated domestically. theirmodel), the consumerprice index may be a relevantindex. This, however,wouldnot be the case for a small open economyas in Sweden.Instead, the averageconsumer as a weightedaverageof price level, p, is determined the prices set by domestic and foreign producers, p = (1 - m)pd + mpm, where pd is the domestic consumerprice, pm the price of importedconsumer goods and m the value of importedconsumergoods as a share of total consumption. By takingthe differencesof this index, holdingthe imshare constant,we may derive the relevantprice inflation for goods port and consumeddomestically produced
S= - mtA Pt-1 - mtpl
(11)
which is our dependent variable.9 We used quarterly data from 1963:1 to 2000:2 which are annualized by calculatingthe percentagechange in the relevantprice indices duringthe last four quarters.10 Figure Al in the Appendixdisplays a scatterplotof and open unemployment consumerprice inflation. Estimatingthe model for a small open economy implies taking into considerationthe dependenceon external factors. As mentioned above, our dependentvariable,inflation in productsproducedand consumed in as the differencebetweenthe CPI and importedinSweden,is determined flation. However,our inflationseries for importedgoods includesnot only consumptiongoods but also intermediary goods. This introducesa measurementerror into our domestic inflation series in periods when prices of intermediate goods. goods move differentlythan prices of consumption To account for this, and to control for supply shocks, we introduceda numberof dummyvariablesto captureoil price increasesin 1973-1974 and 1979-1981, and decreases in 1986. Dummies also cover price hikes on food inputs in the early 1970s, the Swedish tax reform in 1990-1991 and the extremewage increasesin 1995-1996 that can be tracedto foreign
9Let7rmdenote inflation in imported consumer Phillips steady-state goods.Forthelong-run in domestic relation in (6) to be valid, so that, we assume thatexchange rates expressed adjust currency, r"= 7rd= 7r holdsforthe longrun. 10 Weareaware thatthiscouldintroduce in theerror somedependence terms, i.e., autocormonths relation. In the Swedish in certain thereare price"shocks" (particularly economy
and July) due to changesthat hit the whole economyat the same time such as the January
of datamust in taxes,newwageagreements, etc.Seasonal government's adjustment changes all be handled withgreatcareand,by defining in thisway,we eliminate therefore inflation this is not the case arenot reliable whenwe havelaggedvariables in the RHS.However, the in ourpreferred of inflation Here, i.e., thosebasedon surveys expectations. regressions,
DW statisticsare in the inconclusive this as if we do not have rangeand we have interpreted The DW statistics seasonaldependence in our data.How severeis the risk of autocorrelation?
a major autocorrelation problem.
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406 P Lundborg and H. Sacklen increasesin prices of pulp and paper.All variablesare defined in greater detail in the Appendix. Results Using maximum-likelihoodmethods, we estimated a total of 120 specifications.The regressionsdifferwith respectto sampleperiods,measures of unemployment and the way in which inflation expectationsare accountedfor. TableAl in the Appendixgives an overviewof the different specifications.In ourjudgment 113 regressionscame out withoutany estimates majorproblemsin terms of identification, meaningfulparameter etc." The following result section deals exclusivelywith the long-runPhillips curve.12We first focus on the results using estimated(adaptive)inflation expectations,not because we place more trust in these results,but simply We then becausethis is the conventional way of dealingwith expectations. reportwhatwe considerto be a morereliableset of resultsbasedon surveys of inflationexpectations. Estimated Expectations Let us first considerthe baselineregressions,i.e., the regressionsfor 1963If the parameter 2000 with unemployment defined as open unemployment. will not vary with inflation. E in (7) is zero, the coefficienton expectations The theory that agents ignore inflationwhen it is low requiresthat E be we find thatE is significantly greaterthanzero. In 23 of the 24 regressions as The positive predictedby theory.13 average estimate of the LSUR is 2.08 percent,associatedwith an averageinflation,LSURI,of 2.61 percent. The vast majorityof LSURs range between 1.6 and 2.5 percentand the associatedLSURIsrangebetween2.0 and 3.0 percent.
cases we ran into problemssimilarto those ADP had in some of their remaining -oo and regressionsfor the U.S., namelythat the estimatesof D and E tendedto approach values coefficient eliminate to was Thatis, the optimization ooc, trying respectively. procedure their "failed"regressions betweenunity and the lower floor. Akerlofet al. did not interpret as results supportinga vertical long-runPhillips curve, but ratheras the result of some unexplained convergence problem.It shouldbe noted that all seven of our regressionswith Four with estimatedexpectations. fall convergence problems into the categoryof regressions We have in the regressions. of the seven regressions occurwhen we use male unemployment We have chosen to disregard not been able to identify any other common characteristics. these failed regressionsin this paper. 12Specifically,the short-run curve in (7) implies the long-runrelationu = (d/Eat)- [1 + Er 2)]r/ a,, where Eat is the sum of the coefficientsfor lagged unemployment. QD(D 13As discussed above, we use four alternative measures for ire, three measures for and 7ftL, In This gives us 24 possible combinations. two alternative lag lengths for unemployment. the convergence one regressionwe encountered problemmentionedin footnote 11.
11 For the
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108* *w *
6-
20 0
* 2 4 6
Unemployment
Fig. 1. Estimatedexpectations:the "average" Phillips curve
some crucialfeaturesof the long-runPhillipscurves Figure1 summarizes implied by the regressions.For each regressionwe have evaluatedthe unrateassociatedwith 0, 2, 4, 6 and 8 percentinflation.To obtain employment a "representative" Phillips curve we then fitted a curve throughthe averrate at the differentlevels of inflation.14 For instance, age unemployment considerthe effect on unemployment of changingthe rateof inflationfrom zero to the LSURI.Largeunemployment take place as inflation reductions is raised from 0 to 2 percentand at LSURIthe total reductionamountsto almost 2.5 percentagepoints. By the time inflationhas reached4 percent, the results suggest that unemployment is again rising. In Table 1, columns (i) and (ii), we report detailed results for two representative regressions.For example, the table shows the size of the coefficient on inflationaryexpectations,Q(.), when evaluatedat different rates of inflation. At zero inflation, the size is approximately 0.5. The coefficient then increaseswith inflation and is close to unity when inflation reaches 6 percent. Recall that the theoreticalmodel interprets the coefficient 1(.) as the share of fully rational firms. This interpretation thus suggests that many firms take inflation fully into account at 6 percent alreadyat price stability,and almostall firms behaverationally inflation. So far, the resultshave indicateda greatdeal of robustness to variations in the way expectationsare estimated.However,we are also interestedin how the model performswith respect to other definitionsof investigating and to other sample periods. The results are discussed in unemployment
14We capturethe unemployment minimumby fitting the curve throughthe averageLSUR and LSURI.
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?
0 0?
0 0 0
0~
0 0
Table 1. Estimatedparametersfor the long-run Phillips curvea

Independent variables and characteristics Constant ut-1 ut-2 D (constant in coefficient on expectations) E (coeff. of rL in coefficient on expectations)
(i) 0.014 (4.08) -1.089 (-2.36) 0.780 (1.67) 0.141 (0.33) 653.85 (3.73)
(ii) 0.015 (3.73) -0.975 (-1.85) -0.002 (-0.01) 0.047 (0.10) 557.36 (2.28)
(iii) 0.032 (6.17) -0.595 (-1.40) 0.169 (0.39) -1.126 (-1.79) 578.51 (2.63)
(iv) 0.042 (8.48) -0.896 (-1.66) -0.870 (-0.85) -0.906 (2.03) 451.83 (3.46)
Table 1. (Continued)
Method for constructing7rL Geometrically declining weights, eq. (9) 16-quarterlag with different weights for each quarter,eq. (10) 2 1963:1-2000:2 0.0254 0.0208 0.044 0.022 0.029 0.043 0.556 0.655 0.882 0.994 1.518 0.879 Geometrically declining weights, eq. (9) 16-quarterMA with different weights for each year, eq. (10) 12 1963:1-2000:2 0.0281 0.0194 0.047 0.022 0.025 0.043 0.519 0.606 0.826 0.980 1.506 0.873 Geometrically declining weights, eq. (8) Survey data 16-quarterMA with different weights for each year, eq. (10) Survey data
Method for constructing 7re
No. of unempl. lags Sample period ? LSURI LSUR Natural rate u(7r= 0.0) u(ir = 2.0) u(7r = 4.0) u(7r = 6.0) (7r= = 4(7r D(7r= D(7r = 0.0) 2.0) 4.0) 6.0)
2 1979:3-2000:2 0.0376 0.0209 0.076 0.038 0.021 0.052 0.130 0.185 0.420 0.831 1.002 0.933
12 1979:3-2000:2 0.0401 0.0296 0.065 0.041 0.030 0.043 0.182 0.234 0.427 0.764 1.150 0.948
'a
DW statistic R2
aAsymptotic areavailable on request. resultsfor all regressions in parentheses. Detailed t-values
the Appendix.The LSURI does not change in any significantway when or unemployment is replacedby total unemployment open unemployment the turbulent we excluded males. In some among prime-aged regressions 1990s. This shifted the LSURs downwardswhile the LSURIs were not significantlyaffected. Direct Measures of Expected Inflation It is far from obvious that estimatedadaptiveexpectationscapturehouseholds' true expectationson inflation.To illustratethis point, Figure2 contraststhe expectations impliedby regression(i) in Table1 to surveydataon households'expectations which are availablefor the period 1979:3-2000:2. The estimatedseries follows the CPI quite closely. It is noteworthythat there are apparentdeviationsfrom the directlymeasuredinflationexpectations. Given that the survey data betterreflect households'true inflation expectations,one might suspect that the results obtainedabove could be misleading. The results for some of the regressionsusing our 1979-2000 survey data are reportedin Table 1, columns (iii) and (iv). A vital observationis that the change of data does not cause a rejectionof the overall results discussed above. The parameter E is still, withoutexception,significantly as Hence, positive. predictedby theory, the reactioncoefficient of price inflation to expected inflation (D(.)) is significantlysmaller in low- than in high-inflationperiods. Figure 3 shows that the average LSURI using survey data (4.01 percent)is somewhathigher than the averageobtained with estimatedexpectations(2.61 percent). Similarly,the average LSUR 16 12
-- ,
-I -
-.-
0 I I
1960
1970 ....... CPI
1980
1990
2000
Estimated expectations Survey expectations

Fig. 2. CPI and expected inflation

6
5-
A -4-----------------------3
101I
--------m
3 2 LSUR * Estimated exp. 1963-2000 * Survey exp. 1979-2000 A Survey + imputed exp. 1963-2000 and minimum Fig.3. Inflation unemployment 1
from increaseswhen we substituted surveydatafor estimatedexpectations, 2.08 to 2.85. One disadvantage of using the relativelyshort surveydata series is that we are unableto utilize the full length of the data on inflationand unemployment.Moreover,this raises the questionof whetherwe have too few observationsand to what extent the results of these regressionsare influenced by the particularsample period. To addressthese issues, we next imputedsurveydata for the period 1963:1-1979:2in orderto obtaina full In Table1, columns(v) and(vi), we surveydataseries for 1963:1-2000:2.15 show detailedresultsfrom some regressions based on this extendedsurvey dataset.The plot in Figure3 illustratesthe most important result, namely thatthe LSURIsare very similarto those obtainedusing the originalsurvey data. Hence, the LSURIsappearnot to be affectedby the sampleperiod. To give an idea of what the individual Phillips curves look like, curves from the regressionswhere Figure 4 displays two representative we used survey data on inflationexpectations. Accordingto these curves, inflationneeds to be around4 percentin orderto be compatiblewith the lowest sustainable rate of unemployment. Note also that a monetarypolicy at aiming price stabilityappearsto be accompanied by largecosts in terms to the of high unemployment, be compared which should 7 around percent, 2-2.5 percentassociatedwith 4 percentinflation. Are these resultsconsistentwith the recentmacroeconomic development? By the end of 2001, the Swedish Riksbankhad succeeded in stabilizing
15 We fitted a regression model that determines our surveydataas a non-linearfunctionof a series for the period 1963:1-1979:2. lagged CPI and predicted
O The editors of the Scandinavian Journal of Economics 2006.
10 8 c 6 ==4 2-
10
Unemployment Surveyexp. 1979-2000 exp. 1963-2000 Survey+ imputed data: tworepresentative curves 1,columns (iv)and (v)) Fig.4. Survey (Table Phillips then inflationat the 2 percenttarget.16 It is noteworthy that unemployment also stabilizedand remainedstable for 24 consecutivemonthsat around4 percent,i.e., at the level predictedby our surveydataregressions.17 Other Objectives than Minimum Unemployment One important changes implicationof the ADP model is that productivity with the rate of inflation.Consequently, there is no a priori reason why maximum output and minimum unemployment would coincide at some inflation rate. Akerlof et al. largely neglected this aspect of the model. and Sacklen(2003) discuss the implicationsof the ADP model Lundborg for the relationbetweeninflationand variablesotherthanunemploymentlike output-that may be of importance to welfare. Let outputbe defined as Q= (1 - u)e, where e is a weighted averageof effort in rationaland near-rational firms.18Lundborgand Sacklen (2003) then show that the theoretical model does not rule out an effort-inflation trade-offat low inflation rates. Consequently, since employment and effort may go in different
16An inflation target of 2 percent (with a lower and upper bound of 1 and 3 percent, respectively)was announcedin 1993, and the Swedish Riksbankassessed that the target would be met duringthe 12 monthsof 1995. from2003 to 2005 and was somewhere between5 and 6 percent increased 17 Unemployment in 2005. Inflation,on the other hand, droppedduring the period 2003-2005, to around 0.5 percent. 1 Note that this rathercrude productionfunction ignores potentiallyimportantlong-run effects of inflationon outputthroughsavings and investment, the qualityof price signals, etc.
directionswhen inflationincreases,the theoretical model cannotrule out an and minimum trade-off. In minimum output-inflation fact, unemployment can at occur the In this of inflation. same rate situation,government output decision-making obviously becomes more complicatedthanjust directing monetarypolicy towardthe inflationrate that minimizesunemployment. What do our regressionsfor Sweden imply about the relationbetween in Lundborg and Sacklen(2003) suggest outputand inflation?Calculations that maximumoutput and minimumunemployment occur at roughlythe same rate of inflation,slightly below 4 percent.19
IV. Concluding Discussion

Akerlof et al. (2000) stronglyrejectedthe verticallong-runPhillips curve when theirmodel was appliedto U.S. data.The fact that our Swedishdata also reject the idea of a vertical curve has a numberof interestingimplications for the Swedish economy and, potentially,for other European countriesas well. A major consequenceis that the level of the inflation target really matters;almost all our regressionssuggest that an inflation rate below 2 percentis associatedwith large costs in terms of unemployment. There is more uncertaintyconcerningthe inflation rate that minimizes unemployment. Our estimates vary across specifications,but the estimates of our point preferredregressions20 suggest that a doublingof to 2 to 4 from inflation, percent, could restrictlong-rununemployment 1.5-3.5 percent. The SwedishRiksbank's 2 percentinflationtargetimplies an unemployment level above the lowest sustainable rate. The fact that actualinflation since the inceptionof the targetin 1995 averages1.3 percentsuggeststhat monetarypolicy has been highly contractive.
19See Lundborg and Sackl6n(2003), Section 2.3 and Figure7. The calculations explorethe estimatesfor the regression basedon surveydata 1963-2000 thatis shownin Figure4-and column (v) in Table 1-of the presentpaper.Using the estimatesfor the U.S. in one of ADP's "representative" Phillips curve regressions,reportedin the first column of Table 2 and Sackl6n(2003) suggest a in Akerlofet al. (2000, p. 32), the calculationsin Lundborg rate of inflationappearsto similarpatternfor the U.S., namelythat the output-maximizing rate of inflation.It should be stressedthat be very close to the unemployment-minimizing these calculationsrely on point estimates,and they have not been subjectto a sensitivity standard errorsare accountedfor. analysiswherethe parameters' 20We referto the regressions as our preferred basedon surveydataon inflationexpectations The reasonfor this is simplythat surveydatacan be expectedto reflect houseregressions. estimation indirect in a betterway thandifferent holds' trueinflationexpectations procedures. Note also that our basic strategyof estimatinga wide rangeof specificationshas led us to of detailedconfidence intervalsfor the Phillips the calculation,and presentation, disregard curves implied by our estimates.Hence, while our regressionsalmost uniformlyreject the aboutthe exact locationand shapeof the curves. verticalcurve,thereis still some uncertainty
?
414 P Lundborgand H. Sacklkn
Froma policy point of view it could, of course,be arguedthat the ADP model is specifiedwithoutcosts thatwouldmakean increaseof the Swedish inflationtargetfrom2 percentto, say,4 percentless desirable. the Changing time takes as it to inflationtargetmay involve short-run costs adjustment our analysis establishcredibilityfor a new target.Perhaps moreimportantly, is set forth in terms of minimumunemployment ratherthan maximum effects of inflationon as it outputand, such, ignores potentiallyimportant growth.21 The possibility of ADP-type long-run Phillips curves across the euro countriesas well may raise some concernabout the EMU project.While detailed studies on other countriesare needed, there is nothing to suggest that these non-verticalPhillips curves would not differ considerably across the euro countries.22Any single inflation level targeted by the ECB would then generate excess unemploymentin individualmember states. Could it be that the supportfor the ADP-type Phillips curve simply reflects a misspecified model where shifts of a vertical long-runPhillips curve (due to institutional changes) have not been fully accountedfor?23 Ourresultssuggest thatthis is not the case. The robustness tests discussed in SectionIII andthe Appendixindicatethata rightward shift of the Phillips curve may indeed have occurredduringthe 1990s; see e.g. Figure A2 in the Appendix.However,the basic "hump" shape of the ADP-typePhillips curveremainsintact.24 the ADP-typePhillipscurvegains support Similarly, even if we dropthe 1960s and 1970s fromour data-see e.g. Figure3 and columns(iii)-(iv) in Table 1.
21
or "grease" effects In the literature thereis a greatdeal of disagreement on possible"sand" of inflation.No firm conclusionsabout the effects of inflationon growth can be drawn. Some studies indicatea large negative associationbetween inflationand growth;see e.g. Summers and Webb(1993), Fischer(1993) or Brunoand Easterly Cukierman, Kalaitzidakis, (1998). Otherstudies raise doubts about the causalityand have arguedthat the effects of inflationon growthare not convincing;see e.g. Romer(2001, p. 552). Changesin inflation are often the endogenouseffect of economic reformsthat could well be the reason for a
association andgrowth. between inflation negative 22 the incidence of editing acrossfirmsize, industry differs etc., structure, If, for instance,
the trade-offwould differ acrosscountries. 23 In the 1960s, Swedenexperienced whereasthe moderateinflationand low unemployment, rates. Followinga 1970s and 1980s witnessedhigh inflationand moderateunemployment
levels. roseto unprecedented macroeconomic in theearly1990s, shock major unemployment
Despite the severity of the shock, it has frequentlybeen arguedthat the unemployment increasealso could be the result of changes in labor marketinstitutions, i.e., the result of shifts of a verticallong-runPhillipscurve. rightward 24Excludingthe 1990s, these particular regressionshave a limited numberof observations on inflationin the 0-3 percentinterval.This, of course, makes it difficult to identify the formrestrictions. shapeof the Phillipscurvebelow the LSURIwithoutrelyingon functional
?
Except for the NAIRU model with its vertical curve, no other known model emerges as a special case of the ADP model. This makes it difficult to assess the risk that data are in fact generatedalong the lines of some othermodel (associatedwith a non-vertical long-runPhillipscurve), in which case our supportfor the ADP-typePhillipscurvewould have followed mainlyfrom functionalmisspecification. In a preliminary attemptto constructa richermodel, Akerlofet al. (2000) presentregressionsthatalso include a term for nominal wage rigidity.These suggest a role for both and nominalwage rigidity.25 Hence, it should be stressed near-rationality that the rejectionof the NAIRU model in this paper in no way excludes the relevanceof othermodels that can yield non-verticallong-runPhillips derive curves.A promisingarea for futureresearchwould be to stringently models that allow us to test the relativestrengthof varioustheories. Appendix Data
CPI (ConsumerPrice Index): 1959:1-2000:2 from StatisticsSweden. Ourquarterlydata
are calculated as arithmetic of the monthly figures. averages

IPI (ImportPrice Index): 1963:1-2000:2 from Statistics Sweden. This index reflects
the pricesof goodsimported as arithmetic to Sweden. Ourquarterly dataarecalculated of the averages monthly figures. the value shares: 1963-2000fromStatistics Sweden. Foreachyearwe calculate Import of goodsandservicesimported to Sweden as a shareof GDPat market prices.Wethen shareto eachquarter. assignthe sameimport
Survey data on expected inflation: 1979:3-2000:2 from the National Instituteof Eco-
nomic Research. on CPI one year ahead, dataon households' Quarterly expectations collectedeveryquarter. ForceSurveys). Season1959:1-2000:2 Sweden(Labor fromStatistics Unemployment: dataon openunemployment as a shareof the laborforce(aged 16-64). ally adjusted Totalunemployment: 1965:1-2000:2from StatisticsSweden(LaborForce Surveys). in activelabormarket dataon open unemployment Seasonally adjusted plus workers (aged 16-64). programs
Male unemployment:1959:1-2000:2 from Statistics Sweden (Labor Force Surveys).
for men aged25-54. dataon openunemployment Seasonally adjusted
25
other arguments, See Akerlofet al. (2000, pp. 30 and 37). As noted in the introduction, like nominal wage rigidity,can give rise to a negativelysloped long-runPhillips curve. For example,the curves derivedfrom nominalwage rigidity in Akerlof et al. (1996) and Holden(2004) havea negativelyslopedsegmentat low inflationanda verticalsegmentwhen inflationis sufficientlyhigh (i.e., the shape of "an invertedJ").
?
416 P Lundborgand H. Sacklen variables: Dummy

Dl = 1 for 1970:3-1970:4, zero otherwise D2 = 1 for 1973:1-1974:1, zero otherwise D3 = 1 for 1974:3, zero otherwise D4 = 1 for 1975:3, zero otherwise D5 = 1 for 1979:1-1980:1, zero otherwise D6= 1 for 1980:2-1981:3, zero otherwise D7 = 1 for 1981:4-1983:3, zero otherwise D8 = 1 for 1986:1-1986:4, zero otherwise D9= 1 for 1990:1-1991:2, zero otherwise DIO= 1 for 1995:3-1996:2, zero otherwise
Table Al. Estimatedspecifications

Unemployment measure Open
Total Male
Estimated inflation expectations 1963-2000 24a

24a 24a
dataon Survey inflation expectations 1979-2000 6b

6b 6b
1963-1990 24a
1963-2000 6b
a As discussed in Section III, we use four alternativemeasures for 7re, three measures for 7rL, and two alternative lag lengths for unemployment.This gives us 24 possible combinations. b Three measures for L7rL and two alternativelag lengths for unemploymentgive us six possible combinations.
Robustness
Using estimated expectations, we first explored the relationshipbetween inflation and total, rather than open, unemployment. Since government expenditures affect open 16 141210-
.9 8
S642 -2 2 4 6 8 10
Unemployment data, 1963-2000 quarterly Fig. Al. Swedish inflationand unemployment:


1963-1991
*4
10 8 *6-
1963-2000
S4 20 0
..
2 Unemployment
Fig. A2. The Phillips curve: 1963-1991 and 1963-2000 unemployment,and also change over the business cycle, it could be argued that total unemploymentbetter capturesthe relevant labor market situation. We thereforewanted to see if the LSURI we obtained based on open unemploymentwould also yield a lowest sustainabletotal unemployment.Moreover,using total unemploymentmight simplify a comparison of our results to those obtained by ADP for the U.S. since open unemploymentwould be considerablyhigher in Sweden in the absence of labor market programs. Results from these regressions can be found in Lundborgand Sacklen (2003). The LSURI does not change in any significant way when open unemploymentis replacedby total unemployment.However, the average LSUR increases from 2.08 percent to 3.89 percent. While this figure is considerablycloser to the LSURs estimatedby ADP, it still falls short of what appearsto be the most common LSURs in their study.26For sake of comparisonwith the results of ADP, we also ran some regressionsbased on prime-aged males. The regressions based on open unemploymentamong males aged 25-54 yield considerably lower LSURs, but the corresponding inflation rates do not differ much from those obtained previously. The turbulentSwedish labor market of the 1990s involved a major increase in unemployment and a drastic decrease in inflation. It therefore seemed reasonableto test whetherexclusion of the 1990s would yield very differentresults. In FigureA2 we show the "average"Phillips curve for 1963:1-1991:2 and the Phillips curve for the period 1963:1-2000:2 (see also Figure Al). Excluding the 1990s implies a leftward shift of the curve: at just a slightly higher inflation rate than for 1963-2000, the average lowest sustainableunemploymentrate is now as low as 1.26 percent. This result suggests that inclusion of the turbulent1990s in the data has some effect on LSUR, while the inflation rate remains stable. The observed change in Figure A2 could indicate that some parametershifts may have occurred during the 1990s, which our model is unable to captureaccurately. 26ADP never reportan "average" estimateof their LSURs to which we may compareour estimates.However, exceed 4 percent. the majorityof theirestimatedLSURs apparently
418 P Lundborgand H. Sacklin
References
P. (1995), Theoriesof Pay and Unemployment: Survey Evidence Agell, J. and Lundborg, P. (2003), SurveyEvidenceon Wage Rigidityand Unemployment: Agell, J. and Lundborg, of Low Akerlof, G. A., Dickens, W T. and Perry, G. L. (1996), The Macroeconomics
Inflation, Brookings Papers on Economic Activity 1, 1-59. Sweden in the 1990s, Scandinavian Journal of Economics 105, 15-29. from Swedish Manufacturing Firms, Scandinavian Journal of Economics 97, 295-307.
Akerlof,G. A., Dickens,W.T and Perry,G. L. (2000), Near-rational Wageand PriceSetting Blinder,A. S., Canetti,E. D., Lebow,D. E. and Rudd,J. B. (1998), AskingAboutPrices: A Journalof MonGrowth, Bruno,M. and Easterly, W. (1998), InflationCrises and Long-run
etary Economics 41, 3-26. New Approach to Understanding Price Stickiness, Russell Sage Foundation, New York. and the Long Run Phillips Curve, Brookings Papers on Economic Activity 1, 1-44.
between Inflationand Bullard,J. and Keating,J. W. (1995), The Long Run Relationship A ComChen, P. and Edin,P. A. (2002), EfficiencyWagesand Industry WageDifferentials: Cukierman, A., Kalaitzidakis, P., Summers,L. H. and Webb, S. B. (1993), CentralBank Dickens,W T. (2001), Commentson CharlesWyplosz's"Do We Know How Low Inflation ShouldBe?",mimeo, BrookingsInstitution, DC. Washington, Djoudad,R. and Sargent,T. C. (1997), Does the ADP Story Providea BetterPhillipsCurve for Canada?, unpublished workingpaper,EconomicStudiesand Policy AnalysisDivision, of Finance,Ottawa. Department
Eckstein, 0. and Brinner, R. (1972), The Inflation Process in the United States, Joint EcoIndependence, Growth, Investment, and Real Rates, Carnegie-Rochester Conference Series on Public Policy 39, 95-140. parison across Methods of Pay, Review of Economics and Statistics 84, 617-631. Output in Post-war Economies, Journal of Monetary Economics 36, 477-496.
nomic Committeeof the Congress of the United States, Government PrintingOffice, DC. Washington, Fair,R. (2000), Testingthe NAIRUModel for the United States,Reviewof Economicsand
Statistics 82, 64-71.
Factorsin Growth,Journal of Monetary Fischer, S. (1993), The Role of Macroeconomic

Economics 32, 485-512.
The Three PercentSolution,Policy Matters,Institute Fortin,P. (2001), InflationTargeting: for Researchin PublicPolicy, Montreal. Holden, S. (2004), The Costs of Price Stability-DownwardNominal Wage Rigidity in King, R. G. and Watson,M. W. (1994), The Post-warU.S. Phillips Curve:A Revisionist
Economic History, Carnegie-Rochester Conference Series on Public Policy 41, 157-219. Europe, Economica 71, 183-208.
and Unemployment Persistence, Lundborg, Targeting P.and Sacklen,H. (2003), Low-inflation Working Paperno. 188, FIEF,Stockholm. New York. 2nd edn., McGraw-Hill, Romer,D. (2001), AdvancedMacroeconomics, a Stable of Achievingand Maintaining P. A. and Solow, R. M. (1960), Problems Samuelson, Price Level: Analytical Aspects of Anti-inflationPolicy, AmericanEconomic Review, Schultze,C. L. (1959), RecentInflationin the UnitedStates,StudyPaperno. 1, Joint EcoDC. nomic Committeeof the 86th Congress,Government Office, Washington, Printing AmericanEconomicReview62, 1-18. Tobin,J. (1972), Inflationand Unemployment, Firstversionsubmitted May 2003; final versionreceivedDecember2005.
Papers and Proceedings 50, 177-194.

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Low-Inflation Targeting and Long-Run Unemployment Author(s): Per Lundborg and Hans Sackln Source: The Scandinavian Journal

Scand.J of Economics108(3), 397-418, 2006 DOI: 10.1111/j.1467-9442.2006.00464.x

Low-inflation Targeting and Long-run Unemployment*

398 P Lundborgand H. Sacklen

Low-inflationtargeting and long-run unemployment 399

II. Near-rationalityand the Phillips Curve

The editors of the Scandinavian Journal of Economics 2006.

Low-inflationtargeting and long-run unemployment 401

= -A + B ) + Cue, 'j i (wj/weR

is abovezero,the If inflation full compensation for expected in consumer inflation prices.

decisionon workers'truereference is thatrationalfirms base theirwage-setting implication

III. The Swedish Long-run Phillips Curve

The average price level is p, =

,(-)]Pn,,,t and 1 +7r, = Pt/Pt-I.

Low-inflationtargeting and long-run unemployment 403

404 P Lundborgand H. Sacklin

Low-inflationtargeting and long-run unemployment 405

a major autocorrelation problem.

C The editorsof the Scandinavian Journalof Economics 2006.

OThe editors of the Scandinavian Journal of Economics 2006.

Low-inflationtargeting and long-run unemployment 407

Table 1. Estimatedparametersfor the long-run Phillips curvea

Method for constructing 7re

aAsymptotic areavailable on request. resultsfor all regressions in parentheses. Detailed t-values

410 P Lundborgand H. Sacklen

1970 ....... CPI

Estimated expectations Survey expectations

Low-inflationtargeting and long-run unemployment 411

O The editors of the Scandinavian Journal of Economics 2006.

412 P Lundborgand H. Sacklen

C The editors of the Scandinavian Journal of Economics 2006.

Low-inflationtargeting and long-run unemployment 413

IV. Concluding Discussion

414 P Lundborgand H. Sacklkn

levels. roseto unprecedented macroeconomic in theearly1990s, shock major unemployment

Low-inflationtargeting and long-run unemployment 415

are calculated as arithmetic of the monthly figures. averages

for men aged25-54. dataon openunemployment Seasonally adjusted

416 P Lundborgand H. Sacklen variables: Dummy

Table Al. Estimatedspecifications

Estimated inflation expectations 1963-2000 24a

dataon Survey inflation expectations 1979-2000 6b

Unemployment data, 1963-2000 quarterly Fig. Al. Swedish inflationand unemployment:

Low-inflationtargeting and long-run unemployment 417

418 P Lundborgand H. Sacklin

Factorsin Growth,Journal of Monetary Fischer, S. (1993), The Role of Macroeconomic

Papers and Proceedings 50, 177-194.

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