Spanish unemployment and inflation persistence : ares there phillips trade-offs?

This paper studies the joint dynamic behaviour of inflation and unemployment in Spain during the period 1964-1995. In particular, we analyze the implication of hysteresis and high inflation persistence for inference regarding Phillips trade-offs and sacrifice ratios in the Spanish economy, in response to a demand shock. To do so we use a Structural V AR approach with several identification outlines which give rise to different interpretations of the joint unemploymentinflation dynamics. When using a bivariate VAR we cannot reject the existent of a permanent output loss of half a percentage point for each percentage point of permanent disinflation. However, when the V AR is augmented in order to disentagle monetary from non-monetary shocks, within the demand class, the evidence favours a transitory trade-off with a cumulative output loss of about six percentage points of GDP