Policy regimes and the persistence of wage inflation and unemployment

Time-varying parameter estimation techniques are used to discover whether countries in the exchange rate mechanism (ERM) experienced a regime change to a lower degree of persistence for both wage inflation and unemployment in the 1980s. The results show that the persistence of wage inflation may have changed over the 1980s for some countries but that this experience was not unique to ERM membership (although the time profile of the persistence parameter for some ERM member countries corresponds to policy shifts related to ERM membership). Furthermore, only a few countries show a decline in the persistence of unemployment in the 1980s.