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An Estimation of the Nonlinear Philips Curve in Colombia

  • Javier Gómez

    ()

  • Juan Manuel Julio

    ()

As originally drawn and estimated by professor Phillips, the Phillips curve is a curve indeed, not a straight line as often thought. Following Laxton, et. al. (1999) we estimate a convex Phillips curve and model the NAIRU as a variable that is unobserved. Using Colombian data, we provide confidence bands for the NAIRU and report estimated sacrifice ratios. Using the unobserved components methodology along with the Kalman filter, we find evidence in favor of a nonlinear Phillips curve and no evidence against a NAIRU that is constant. This latter finding is explained by the high level of uncertainty in the estimation of the NAIRU. Nonlinearity implies that the sacrifice ratio increases with unemployment, in other words, the cost of decreasing inflation is higher the higher the unemployment rate.

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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 001975.

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Length: 16
Date of creation: 31 Oct 2000
Date of revision:
Handle: RePEc:col:000094:001975
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  1. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
  2. Enrique López & Martha Misas, . "Un Exámen Empírico de la Curva de Phillips en Colombia," Borradores de Economia 117, Banco de la Republica de Colombia.
  3. Athanasios Orphanides & David W. Wilcox, 1996. "The opportunistic approach to disinflation," Finance and Economics Discussion Series 96-24, Board of Governors of the Federal Reserve System (U.S.).
  4. Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 2001. "Inflation Targeting with NAIRU Uncertainty and Endogenous Policy Credibility," IMF Working Papers 01/7, International Monetary Fund.
  5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  6. Douglas Staiger & James H. Stock & Mark W. Watson, 1996. "How Precise are Estimates of the Natural Rate of Unemployment?," NBER Working Papers 5477, National Bureau of Economic Research, Inc.
  7. Jean-François Fillion & André Léonard, 1997. "La courbe de Phillips au Canada : un examen de quelques hypothèses," Working Papers 97-3, Bank of Canada.
  8. Frank Smets, 1998. "Output gap uncertainty: does it matter for the Taylor rule?," BIS Working Papers 60, Bank for International Settlements.
  9. Robert G. King & Mark W. Watson, 1994. "The post-war U.S. Phillips curve: a revisionist econometric history," Working Paper Series, Macroeconomic Issues 94-14, Federal Reserve Bank of Chicago.
  10. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
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