Merging the Purchasing Power Parity and the Phillips Curve Literatures

The main purpose of this article is to merge together two strands of the literature regarding, either directly or indirectly, inflation—specifically, the purchasing power parity and the Phillips curve ones. To accomplish this task, this contribution applies the tools of Dynamic Panel Data estimation on a sample of eighty one Italian provinces from the year 1986 to the year 1998, exploiting cross-sectional variation to avoid using instruments not directly connected with the inflation-generating process. This research strategy allows us to conclude that inflation is characterized by a low degree of persistence and by conditional β-convergence across provinces. Its most suitable driving variable is the unemployment rate, and there are long-term nonneutralities at the regional level.