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A time-varying Phillips curve with global factors: Are global factors important?

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  • Kabundi, Alain
  • Poon, Aubrey
  • Wu, Ping

Abstract

Increased globalization and trade have integrated the world, but whether they are the underlying drivers of the flattening of the Phillips curve slope is not clear. This problem is further complicated since time-varying parameters are empirically important in most applications as the role of global factors may change over time. This paper investigates empirically the role played by global and domestic factors in driving dynamics in inflation using a panel data comprising of 23 advanced (AEs) and 11 emerging market economies (EMEs), from 1995Q1 to 2018Q1. The results indicate the predominance and increasing importance of global factors in explaining inflation dynamics, especially for EMEs. The Phillips curve is flat for both groups, but it is flatter in AEs. The results are consistent with the theoretical view that increased globalization and trade are underlying factors behind the flattening of the Phillips curve.

Suggested Citation

  • Kabundi, Alain & Poon, Aubrey & Wu, Ping, 2023. "A time-varying Phillips curve with global factors: Are global factors important?," Economic Modelling, Elsevier, vol. 126(C).
  • Handle: RePEc:eee:ecmode:v:126:y:2023:i:c:s0264999323002353
    DOI: 10.1016/j.econmod.2023.106423
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    More about this item

    Keywords

    Trend inflation; Global factors; Non-linear state space model; Multi-country;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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