Modelling Inflation in Australia
AbstractThis paper estimates a range of single-equation models of inflation for Australia. We find that traditional models, such as the expectations-augmented standard Phillips curve or mark-up models, outperform the more micro-founded New-Keynesian Phillips curve (NKPC) in explaining trimmed mean inflation, both in terms of in-sample fit and significance of coefficients. This in large part reflects the weak instruments problem in the estimation of the NKPC, and is partly corrected by including a direct measure of inflation expectations, but we still find that the unemployment rate or growth in marginal costs (unit labour cost and import prices) provides a better fit than either the output gap or level of real marginal costs. These traditional models also perform well in out-of-sample tests, relative to alternative models and some common benchmarks, with the standard Phillips curve clearly superior to these benchmarks on this test. As inflation has become better anchored and hence less variable, the magnitude of the errors of the single-equation models has declined, although the explanatory power (in terms of R-squared) has fallen together with this greater stability. We also investigate the empirical importance of some other variables that are commonly cited as determinants of inflation, and find little evidence that either commodity prices or the growth rate of money directly influence Australian underlying inflation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2010-03.
Date of creation: Jun 2010
Date of revision:
Find related papers by JEL classification:
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-17 (All new papers)
- NEP-CBA-2010-07-17 (Central Banking)
- NEP-MON-2010-07-17 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gunnar Bårdsen & Stan Hurn & Zoë McHugh, 2001.
"Modelling Wages and Prices in Australia,"
Working Paper Series
1202, Department of Economics, Norwegian University of Science and Technology, revised 30 Sep 2005.
- David Gruen & Adrian Pagan & Christopher Thompson, 1999.
"The Phillips Curve in Australia,"
RBA Research Discussion Papers
rdp1999-01, Reserve Bank of Australia.
- Jarkko Jääskelä & Kristoffer Nimark, 2008.
"A Medium-scale Open Economy Model of Australia,"
RBA Research Discussion Papers
rdp2008-07, Reserve Bank of Australia.
- Alexandra Heath & Ivan Roberts & Tim Bulman, 2004. "Inflation in Australia: Measurement and Modelling," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
- David Gruen & Tim Robinson & Andrew Stone, 2002. "Output Gaps in Real Time: Are They Reliable Enough to Use for Monetary Policy?," RBA Research Discussion Papers rdp2002-06, Reserve Bank of Australia.
- 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.
- Ken Kuttner & Tim Robinson, 2008. "Understanding the Flattening Phillips Curve," Department of Economics Working Papers 2008-15, Department of Economics, Williams College.
- Ken Kuttner & Tim Robinson, 2008. "Understanding the Flattening Phillips Curve," RBA Research Discussion Papers rdp2008-05, Reserve Bank of Australia.
- Michael B. Devereux & Charles Engel, 2001. "Endogenous Currency of Price Setting in a Dynamic Open Economy Model," NBER Working Papers 8559, National Bureau of Economic Research, Inc.
- Macallan, Clare & Millard, Stephen & Parker, Miles, 2008. "The cyclicality of mark-ups and profit margins for the United Kingdom: some new evidence," Bank of England working papers 351, Bank of England.
- Kitov, Ivan & Kitov, Oleg, 2011.
"The Australian Phillips curve and more,"
28762, University Library of Munich, Germany.
- Elaine Chung & Marion Kohler & Christine Lewis, 2011. "The Exchange Rate and Consumer Prices," RBA Bulletin, Reserve Bank of Australia, pages 9-16, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew).
If references are entirely missing, you can add them using this form.