The Relation between Inflation and Regional Unemployment and Sectoral Income Growth Dispersion: Evidence from EU-Countries

Using data from 15 EU countries for 1974-2004, with various specifications and estimation methods this paper gives strong support to the idea that the aggregate inflation-output gap or inflation-unemployment rate relationship is not linear because inflation is relatively more sensitive to markets and regions that are close to a capacity constraint. Accordingly, inflation is not only related to the average output gap or average unemployment rate but also to corresponding dispersion variables. In the light of this, it seems worth reconsidering how price stabilization is carried out in practice in the euro area.