Introduction

It is probably fair to say that the analysis of the wage-price mechanism is one of the areas of applied macroeconomics that has received most atten- tion. This is, of course, especially true ever since chapter 25 was first published in 1958. The ‘Phillips Curve’ became, at first, an essential, and then a controversial ingredient of macro-models of the economy. Over the years, numerous studies have been undertaken in different countries, to estimate and test many variants of the Phillips Curve. Although there are some results with which most economists seem to agree, one is nevertheless left with the impression that the empirical evidence for or against the existence of a stable long-term relationship between the rate of change of wages (or of prices) and the rate of unemployment remains contradictory.

The last decade has seen much development in dynamic econometric modelling of economic time series. These developments, which have gone mainly ignored in most empirical studies of the wage-price mechanism, concern issues related to the exogeneity of variables, cointegration or the existence of a long-run relation between ‘integrated’ economic variables, and finally single equation versus system modelling. Much of the empirical evidence reviewed in Nickell (1990a) and in Bean (1994) is based on the estimation of conditional wage and price equations. If the regressor variables can legitimately be assumed to be weakly exogenous for the parameters of interest in the conditional model, then efficient estimation and testing may be conducted by analysing only the conditional model.