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The European Unemployment Gap And The Role Of Monetary Policy

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Executive Summary

This paper will shed some light on the debate on the impact of monetary policy on the labour market in Europe. The Phillips curve implies that demand-induced changes in inflation tend to lag behind movements in the unemployment rate, which means that a comparison between the actual unemployment rate and the NAIRU may be helpful in forecasting future changes in inflation. By using an unobserved component model with a Kalman filter, the authors estimate the NAIRU for three countries in the euro area. Moreover, using a Markov switching model they investigate whether European monetary policy is responsible for these unemployment gaps and whether the interest rate is transmitted asymmetrically across countries.

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