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New Keynesian Phillips Curve and inflation dynamics in Australia

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  • Abbas, Syed Kanwar
  • Sgro, Pasquale M.

Abstract

The New Keynesian Phillips Curve (NKPC) was developed as a response to the New Classical critique that Keynesian macroeconomics lacked micro-foundations. The NKPC provides theoretical micro-foundations that attempt to explain, inter alia, nominal rigidities and, explicitly price stickiness. This paper investigates the validity of the NKPC for Australia. In contrast to the findings for the USA and Euro area, we find that neither the output gap nor marginal cost appears to be a key driving force variable across different set of instruments and estimators (GMM and 2SLS) over the sample period from 1959 to 2009. The flattening of the NKPC along with significant presence of price stickiness is also found in the data. In particular, the reduced form coefficients and implied estimates from the structural parameters of the model support the view that inflation dynamics are forward looking while the role of lagged inflation is also statistically important only after 1980s. However, we claim that the forward looking baseline NKPC contrary to the hybrid NKPC is stable and better explains inflation dynamics for the Australian economy.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 4 (July)
Pages: 2022-2033

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:4:p:2022-2033

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: New Keynesian Phillips Curve Australian inflation dynamics Price stickiness;

References

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Citations

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Cited by:
  1. Malikane, Christopher, 2013. "A New Keynesian Triangle Phillips Curve," MPRA Paper 43548, University Library of Munich, Germany.
  2. Malikane, Christopher, 2012. "The Microfoundations of the Keynesian Wage-Price Spiral," MPRA Paper 42923, University Library of Munich, Germany, revised 2012.
  3. Steffen Ahrens & Matthias Hartmann, 2014. "State-dependence vs. Time-dependence: An Empirical Multi-Country Investigation of Price Sluggishness," Kiel Working Papers 1907, Kiel Institute for the World Economy.
  4. Tiwari, Aviral Kumar & Oros, Cornel & Albulescu, Claudiu Tiberiu, 2014. "Revisiting the inflation–output gap relationship for France using a wavelet transform approach," Economic Modelling, Elsevier, vol. 37(C), pages 464-475.
  5. Malikane, Christopher, 2012. "Inflation dynamics and the cost channel in emerging markets," MPRA Paper 42688, University Library of Munich, Germany.

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