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Estimates of the New Keynesian Phillips Curve for Pakistan

Author

Listed:
  • Kalim Hyder

    (State Bank of Pakistan)

  • Stephen G. Hall

    (The University of Leicester School of Business
    University of Pretoria)

Abstract

This paper presents estimates of the New Keynesian Phillips Curve (NKPC) for the agriculture, manufacturing and services sectors of Pakistan’s economy. The real marginal cost—derived from dynamic translog cost function—labour share of income and output gap are the indicators of economic activity along with past and expected inflation to determine inflation dynamics in each sector. The estimates of the structural parameters of the NKPC are consistent with economic theory in most of the models. Within-sample forecast performance and diagnostic tests indicate that the derived measure of real marginal cost performs better relative to the specifications with labour share of income or output gap. Further, the NKPC based on restrictive Cobb–Douglas production technology with labour input only does not perform better than the models that considers more inputs and intermediate cost. Our results show that the manufacturing is forward-looking sector followed by services and agriculture sectors.

Suggested Citation

  • Kalim Hyder & Stephen G. Hall, 2020. "Estimates of the New Keynesian Phillips Curve for Pakistan," Empirical Economics, Springer, vol. 59(2), pages 871-886, August.
    • Handle: RePEc:spr:empeco:v:59:y:2020:i:2:d:10.1007_s00181-019-01659-8
    DOI: 10.1007/s00181-019-01659-8
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    More about this item

    Keywords

    Inflation; Phillips curve; Real marginal cost; Pakistan;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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