Policy Regimes and the Persistence of Wage Inflation and Unemployment

This paper uses time-varying parameter estimation techniques to discover whether the exchange-rate mechanism (ERM) member countries experienced a regime change to a lower degree of persistence for both wage inflation and unemployment in the 1980s. The results show that the persistence of wage inflation may have changed over the 1980s for some countries, but that this experience was not unique to ERM membership (although the time profile of the persistence parameter for some ERM member countries corresponds with policy shifts related to ERM membership). Furthermore, only a few countries show a decline in the persistence of unemployment in the 1980s. Copyright 1998 by Blackwell Publishers Ltd and The Victoria University of Manchester