Inflation expectations, labour markets and EMU

Thesis

This thesis examines the measurement, applications and properties of consumer inflation expectations in the context of eight European Union countries: France, Germany, the UK, Spain, Italy, Belgium, the Netherlands and Sweden.

The data proceed mainly from the European Commission's Consumer Survey and are qualitative in nature, therefore requiring quantification prior to use. This study first seeks to determine the optimal quantification methodology among a set of approaches spanning three traditions, associated with Carlson-Parkin (1975), Pesaran (1984) and Seitz (1988). The success of a quantification methodology is assessed on the basis of its ability to match quantitative expectations data and on its behaviour in an important economic application, namely the modelling of wages for our sample countries. The wage equation developed here draws on the theoretical background of the staggered contracts and the wage bargaining literature, and controls carefully for inflation expectations and institutional variables. The Carlson-Parkin variation proposed in Curto Millet (2004) was found to be the most satisfactory. This being established, the wage equations are used to test the hypothesis that the advent of EMU generated an increase in labour market flexibility, which would be reflected in structural breaks. The hypothesis is essentially rejected. Finally, the properties of inflation expectations and perceptions themselves are examined, especially in the context of EMU. Both the rational expectations and rational perceptions hypotheses are rejected. Popular expectations mechanisms, such as the "rule-of-thumb" model or Akerlof et al.'s (2000) "near-rationality hypothesis" are similarly unsupported. On the other hand, evidence is found for the transmission of expert forecasts to consumer expectations in the case of the UK, as in Carroll's (2003) model. The distribution of consumer expectations and perceptions is also considered, showing a tendency for gradual (as in Mankiw and Reis, 2002) but non-rational adjustment. Expectations formation is further shown to have important qualitative features.

Authors: Curto Millet, F

• Publication date: 2007
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: University of Oxford
• Language: English
• Keywords: labour market institutions; time series; credibility; central banks; flexibility; nonwage labor costs; expert forecasts; wage differentials; wage level; unemployment; competitiveness; expectations; labor markets; equilibrium correction models; compensation; productivity; inflation; distribution; survey data; exchange rate mechanism; policy coordination; inflation expectations; wages; euro; econometric modeling; public policy; collective bargaining; consumers; perceptions; inflation targeting; Phillips curve; Europe; EMU; forecasting; trade unions; policy design; benefits; applied econometrics; rationality; European Monetary Union; inflation perceptions; macroeconomics; institutions; survey methods; unions; labour markets; European Union; expectations distribution; monetary policy; wage equations; labor costs; quantification; deflation; prices
• Subjects: Econometrics; Labour economics; Economics; Macro and international economics; Economic history