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A Theory-Based, State-Dependent Phillips Curve and its Estimation

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  • Hsiu-Yun Lee
  • Jyh-Lin Wu
  • Show-Lin Chen

Abstract

To explain the existing empirical irregularity about the slope of a Phillips curve, this article provides a model of imperfect competition to show that the slope of a Phillips curve is shock-dependent. We empirically apply a state-space, Markov-switching model to examine the impact of inflation surprise on the unemployment gap, resulting in the state-dependent Phillips curve fitting quite well. Our empirical evidence indicates that an unexpected monetary expansion does produce effects in reducing unemployment rates and that supply shocks should not be ignored in estimating the Phillips curve because they dominate demand shocks in several nonoil shock periods. (JEL C51, E24, E52) Copyright 2005, Oxford University Press.

Suggested Citation

  • Hsiu-Yun Lee & Jyh-Lin Wu & Show-Lin Chen, 2005. "A Theory-Based, State-Dependent Phillips Curve and its Estimation," Economic Inquiry, Western Economic Association International, vol. 43(1), pages 194-205, January.
  • Handle: RePEc:oup:ecinqu:v:43:y:2005:i:1:p:194-205
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    File URL: http://hdl.handle.net/10.1093/ei/cbi013
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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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