Abstract:The analysis of Portuguese inflation, based on annual data from 1961 to 2012, using the Johansen Method, allows us to conclude that variation in Portuguese inflation is determined essentially by foreign inflation and by variation in the effective exchange rate, but the lagged variation of budget deficit seems to causes variation of inflation in the studied period. In the long run there are two long-run relationships. Both the inflation rate and the wage inflation rate relate positively with the General Government Balance in percentage of GDP, negatively with the exchange rate index, positively with the foreign inflation index and negatively with the trend. In the short run the variation of the inflation rate relates positively with foreign inflation (or its variation) and the variation in the effective exchange rate, relates negatively with the error correction mechanism, so there is a significant response to the equilibrium error between inflation rate and its determinants. In addition to this adjustment, the inflation rate responds positively and significantly to the lagged variation of the budget deficit, as expected.

This paper estimates the Phillips curve in Portugal using the Johansen Method, with the wage inflation rate as a dependent variable, based on annual data from the period 1954-1995. The main conclusions are as follows. Firstly, in the long term, the wage inflation rate relates positively to the inflation rate and negatively to the unemployment rate, as expected. There is also a positive relationship between the wage inflation rate and the average labour productivity growth index. Secondly, in the short term, the variation of the wage inflation rate relates negatively and significantly to the error correction mechanism with a negative unitary coefficient; therefore, there is a quick and significant response to the equilibrium error between the wage inflation rate and its determinants. Besides this adjustment, the wage inflation rate responds positively to a lagged wage inflation rate. The variation in the unemployment rate and the average labour productivity growth present the expected signal, negative and positive respectively, but without significance in the short term. The dummy that refers to the April 1974 revolution is significant.

The estimation of the Phillips curve in Italy, using the wage inflation rate as a dependent variable, based on annual data from the period 1961-2012, using the Johansen Method, allows us to conclude two things. Firstly, in the long term, there are two long-term relationships: the wage inflation rate relates positively to the inflation rate, negatively to the unemployment rate and positively to the average labour productivity growth index, as was expected; the inflation rate relates positively to the wage inflation rate, negatively to the unemployment rate and positively to the average labour productivity growth index, as was expected. Secondly, in the short term, the variation of the wage inflation rate relates positively and significantly to the error correction mechanism of the first long-term relationship; therefore, there is a significant response to the equilibrium error between the wage inflation rate and its determinants (inflation rate, unemployment rate, labour productivity growth index). Besides this adjustment, the variation of wage inflation rate responds significantly and negatively to the variation in unemployment rate and significantly and positively to the average labour productivity growth. JEL Classification: C12, C32, E24, E31