A Phillips Curve Interpretation of Error-Correction Models of the Wage and Price Dynamics

This paper presents a model of employment, distribution and inflation in which a modern error correction specification of the nominal wage and price dynamics (referring to claims on income by workers and firms) occupies a prominent role. It is brought out, explicitly, how this rather typical error-correction setting, which actually seems to capture the wage and price dynamics of many large-scale econometric models quite well, is fully compatible with the notion of an old-fashioned Phillips curve with finite slope. It is shown how the steady-state impact of various shocks to the model can be profitably conceived of and interpreted in terms of (and to some extent even calculated by means of) this long-run Phillips curve