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Flattening of the Phillips Curve and the Role of Oil Price: An Unobserved Components Model for the USA and Australia

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  • Paradiso, Antonio
  • Rao, B. Bhaskara

Abstract

We use the unobserved components model of Harvey (1989 and 2011) to estimate the Phillips curve (PC) for the USA and Australia, by augmenting it with oil prices. We found that the level coefficient of inflation and the coefficient of demand pressure have declined and contributed to the flattening of the Phillips curve. But the coefficient of oil prices has increased and has partly offset these effects. Therefore, oil prices are likely to play a significant role in future inflation rates.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29606.

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Date of creation: 06 Mar 2011
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Handle: RePEc:pra:mprapa:29606

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Keywords: Unobserved components; Harvey; USA; Australia; Flattening of the Phillips curve and Oil prices;

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  1. John C. Williams, 2006. "Inflation persistence in an era of well-anchored inflation expectations," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct13.
  2. Harvey, A., 2008. "Modeling the Phillips curve with unobserved components," Cambridge Working Papers in Economics 0805, Faculty of Economics, University of Cambridge.
  3. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
  4. Olivier Blanchard & Jordi Galí, 2005. "Real wage rigidities and the new Keynesian model," Economics Working Papers 912, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2005.
  5. Fuhrer, Jeffrey C., 2010. "Inflation Persistence," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 9, pages 423-486 Elsevier.
  6. Roberts, John M, 2006. "Monetary Policy and Inflation Dynamics," MPRA Paper 812, University Library of Munich, Germany.
  7. Kuttner, Ken & Robinson, Tim, 2010. "Understanding the flattening Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 110-125, August.
  8. Timothy Cogley & Giorgio E. Primiceri & Thomas J. Sargent, 2010. "Inflation-Gap Persistence in the US," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 43-69, January.
  9. Frederic S. Mishkin, 2007. "Inflation Dynamics," NBER Working Papers 13147, National Bureau of Economic Research, Inc.
  10. Commandeur, Jacques J.F. & Koopman, Siem Jan, 2007. "An Introduction to State Space Time Series Analysis," OUP Catalogue, Oxford University Press, number 9780199228874, September.
  11. Edelstein, Paul & Kilian, Lutz, 2009. "How sensitive are consumer expenditures to retail energy prices?," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 766-779, September.
  12. Harvey,Andrew C., 1991. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, number 9780521405737.
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