An empirical analysis of regional Phillips Curve with spatial dependence

Abstract

We estimate the Phillips Curve using panel data to infer the slope of the aggregate Phillips Curve for Spain. In recent years, inflation has become a puzzle for economists and monetary authorities and academic research has been more active suggesting many possible explanations to the inflation experience which has led to the proliferation of many theoretical and empirical studies. One of the main explanations for this puzzle is that national data are sub-optimal in order to reflect regional heterogeneity in inflation dynamics. In this paper we try to shed some light to this debate through an empirical analysis from the 17 Spanish NUTS2 for the period 2006–2017. Our investigation spans both the Great Recession, which in Spain lasted from 2008 to 2014, and the subsequent recovery years, addressing the renewed doubts regarding the usefulness of the Phillips Curve. The analysis is carried out through spatial econometric techniques and through a regional approach, we merge together this strand of the literature with the Purchasing Power Literature. The conclusions are that Spanish Phillips Curve is alive but flattened and a strong regional price convergence is present at the Spanish regional level.