Balance Sheet Recessions and Time-Varying Coefficients in a Phillips Curve Relationship: An Application to Finnish Data

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Abstract

Edmund Phelps (1994) introduced a modified Phillips curve where the natural rate of unemployment is a function of the real interest rate instead of a constant. Koo (2010) argues that the effect of the interest rate on the macro economy is likely to be diluted during a balance sheet recession such as those recently seen in many countries. In the late 1980s, after having deregulated credit and capital movements, Finland experienced a housing boom which subsequently developed into a serious economic crisis similar to the recent ones. To learn from the Finnish experience we estimate the Phelps modified Phillips curve and use a Smooth Transition (STR) model to distinguish between ordinary periods and balance sheet recessions.
Original languageEnglish
Title of host publicationEssays in Nonlinear Time Series Econometrics
Number of pages31
PublisherOxford University Press
Publication date2014
Chapter5
ISBN (Print)9780199679959
DOIs
Publication statusPublished - 2014

Keywords

  • Faculty of Social Sciences
  • smooth transition model
  • cointegration
  • Phillips curve
  • financial crisis

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