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Testing the Stability of the Canadian Phillips Curve Using Exact Methods

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  • Lynda Khalaf
  • Maral Kichian

Abstract

Postulating two different specifications for the Canadian Phillips curve (a purely backwardlooking model, and a partly backward-, partly forward-looking model), the authors test for structural breaks in the parameters of the equation. In each case, they account for the possibilities that: (i) breaks can be discrete, or continuous, and (ii) available data samples may be too small to justify using asymptotically valid structural-change tests. Thus, the authors use recent testing procedures that are valid in finite samples, applying the Dufour-Kiviet (1996) methodology for discrete-type breaks, and the Dufour (2002) Maximized Monte Carlo test method for continuous-type shifts. The second test accounts for nuisance parameters that appear only under the alternative. The proposed alternative is a Kalman-filter-based time-varying-parameter specification, with coefficients that follow random walks. The authors find evidence for linear and non-linear breaks, the latter being characterized by continuous and unpredictable-type shifts in the inflation-dynamics coefficients.

Suggested Citation

  • Lynda Khalaf & Maral Kichian, 2003. "Testing the Stability of the Canadian Phillips Curve Using Exact Methods," Staff Working Papers 03-7, Bank of Canada.
    • Handle: RePEc:bca:bocawp:03-7
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    References listed on IDEAS

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    Cited by:

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    3. Pierre Fortin, 2013. "The Macroeconomics of Downward Nominal Wage Rigidity : a Review of the Issues and New Evidence for Canada," Cahiers de recherche 1309, CIRPEE.

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    More about this item

    Keywords

    Econometric and statistical methods;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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