European Central Bank working paper finds the euro area price Phillips curve is statistically significant but relatively flat once national inflation expectations are controlled for

The European Central Bank published Working Paper No 3133 estimating the euro area price Phillips curve using subnational regional data, concluding that inflation responds to labour market slack but the relationship is relatively flat and becomes markedly flatter when national inflation expectations are taken into account. The paper is part of the ECB Working Paper Series and does not represent the ECB’s views. The analysis draws on annual data for 168 NUTS-2 regions across 11 euro area countries from 1999 to 2023, using the regional GDP deflator for inflation, the regional unemployment rate for slack, and one-year-ahead professional inflation forecasts (Consensus Economics) for expectations. In specifications with region and time fixed effects the estimated slope is negative and significant (for example, -0.19), but it declines when national inflation expectations are included (-0.12) and approaches zero under region and country-time fixed effects (-0.02). Threshold tests suggest steeper responsiveness at low unemployment in simpler models, but the evidence for nonlinearity weakens once inflation expectations are controlled for and disappears when country-time effects are used; instrumental-variable checks using lagged unemployment and a shift-share (Bartik) instrument broadly support the baseline results, with the shift-share instrument losing relevance under country-time fixed effects.