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 language | English |
|---|---|
| Title of host publication | Essays in Nonlinear Time Series Econometrics |
| Number of pages | 31 |
| Publisher | Oxford University Press |
| Publication date | 2014 |
| Chapter | 5 |
| ISBN (Print) | 9780199679959 |
| DOIs | |
| Publication status | Published - 2014 |
Keywords
- Faculty of Social Sciences
- smooth transition model
- cointegration
- Phillips curve
- financial crisis
