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Can Phillips curve explain the recent behavior of inflation? Further evidence from USA and Canada

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  • Chletsos, Michael
  • Drosou, Vasiliki
  • Roupakias, Stelios

Abstract

This paper explores the ability of the Phillips curve to forecast inflation over the course of the recent Great Recession. We use quarterly data for the USA and Canada for the period 1960Q1 through 2013Q4. Estimating the slope of the Phillips curve over a rolling 10-year (40-quarter) window, we find evidence in favor of its empirical instability for both countries. More precisely, our results suggest that the slope coefficient becomes smaller for the USA from 1980 and onwards, while it increases for Canada since 2000. We then simulate inflation for the period 2008Q1 to 2013Q4 and compare the results with those obtained from a standard, constant coefficient Phillips curve model. We conclude that modeling time variation of the slope parameter helps improve the accuracy of predictions for the USA, but not for Canada.

Suggested Citation

  • Chletsos, Michael & Drosou, Vasiliki & Roupakias, Stelios, 2016. "Can Phillips curve explain the recent behavior of inflation? Further evidence from USA and Canada," The Journal of Economic Asymmetries, Elsevier, vol. 14(PA), pages 20-28.
    • Handle: RePEc:eee:joecas:v:14:y:2016:i:pa:p:20-28
    DOI: 10.1016/j.jeca.2016.07.005
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    2. Machado, P.G. & Cunha, M. & Walter, A. & Faaij, A. & Guilhoto, J.J.M., 2021. "Biobased economy for Brazil: Impacts and strategies for maximizing socioeconomic benefits," Renewable and Sustainable Energy Reviews, Elsevier, vol. 139(C).
    3. Alexius, Annika & Lundholm, Michael & Nielsen, Linnea, 2020. "Is the Phillips curve dead? International evidence," Research Papers in Economics 2020:1, Stockholm University, Department of Economics.

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    More about this item

    Keywords

    Philips curve; Inflation; Forecasts;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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