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Modeling The Philips Curve: A Time-Varying Volatility Approach

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  • Ewing, Bradley T.
  • Seyfried, William L

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Abstract

This paper examines the Phillips curve relationship when the second moment of inflation is nonlinear. Specifically, we estimate GARCH models that provide evidence consistent with Keynesian-type models that imply output "overshooting" and inflation fluctuations following aggregate demand shocks. Additionally, the evidence suggests that an increase in the conditional variability of inflation leads to higher levels of inflation.

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Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

Volume (Year): 3 (2003)
Issue (Month): 2 ()
Pages:

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Handle: RePEc:eaa:aeinde:v:3:y:2003:i:3_7

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  1. Robert G. King & Mark W. Watson, 1997. "Testing long-run neutrality," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
  2. Patricia Reagan & Rene M. Stulz, 1993. "Contracting costs, inflation, and relative price variability," Proceedings, Federal Reserve Bank of Cleveland, pages 585-611.
  3. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  6. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  7. W. Bolt & P.J.A. van Els, 1998. "Output gap and inflation in the EU," WO Research Memoranda (discontinued) 550, Netherlands Central Bank, Research Department.
  8. Nobay, A. R. & Peel, D. A., 2000. "Optimal monetary policy with a nonlinear Phillips curve," Economics Letters, Elsevier, vol. 67(2), pages 159-164, May.
  9. Michael T. Owyang, 2001. "Persistence, excess volatility, and volatility clusters in inflation," Review, Federal Reserve Bank of St. Louis, issue Nov., pages 41-52.
  10. Tim Bollerslev & Jeffrey M. Wooldridge, 1988. "Quasi-Maximum Likelihood Estimation of Dynamic Models with Time-Varying Covariances," Working papers 505, Massachusetts Institute of Technology (MIT), Department of Economics.
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