Modelling Inflation in Australia
This paper estimates a range of single-equation models of inflation for Australia. We find that traditional models, such as the expectations-augmented standard Phillips curve or mark-up models, outperform the more micro-founded New-Keynesian Phillips curve (NKPC) in explaining trimmed mean inflation, both in terms of in-sample fit and significance of coefficients. This in large part reflects the weak instruments problem in the estimation of the NKPC, and is partly corrected by including a direct measure of inflation expectations, but we still find that the unemployment rate or growth in marginal costs (unit labour cost and import prices) provides a better fit than either the output gap or level of real marginal costs. These traditional models also perform well in out-of-sample tests, relative to alternative models and some common benchmarks, with the standard Phillips curve clearly superior to these benchmarks on this test. As inflation has become better anchored and hence less variable, the magnitude of the errors of the single-equation models has declined, although the explanatory power (in terms of R-squared) has fallen together with this greater stability. We also investigate the empirical importance of some other variables that are commonly cited as determinants of inflation, and find little evidence that either commodity prices or the growth rate of money directly influence Australian underlying inflation.
|Date of creation:||Jun 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.rba.gov.au/
More information through EDIRC
|Order Information:||Web: http://www.rba.gov.au/forms/rdp-order-form/|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gunnar B�Rdsen & Stan Hurn & Zo� Mchugh, 2007.
"Modelling Wages and Prices in Australia,"
The Economic Record,
The Economic Society of Australia, vol. 83(261), pages 143-158, 06.
- Alexandra Heath & Ivan Roberts & Tim Bulman, 2004. "Inflation in Australia: Measurement and Modelling," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
- Michael B. Devereux & Charles Engel, 2001. "Endogenous Currency of Price Setting in a Dynamic Open Economy Model," NBER Working Papers 8559, National Bureau of Economic Research, Inc.
- David Gruen & Tim Robinson & Andrew Stone, 2002. "Output Gaps in Real Time: Are They Reliable Enough to Use for Monetary Policy?," RBA Research Discussion Papers rdp2002-06, Reserve Bank of Australia.
- David Gruen & Adrian Pagan & Christopher Thompson, 1999.
"The Phillips Curve in Australia,"
RBA Research Discussion Papers
rdp1999-01, Reserve Bank of Australia.
- Ken Kuttner & Tim Robinson, 2008.
"Understanding the Flattening Phillips Curve,"
RBA Research Discussion Papers
rdp2008-05, Reserve Bank of Australia.
- Kuttner, Ken & Robinson, Tim, 2010. "Understanding the flattening Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 110-125, August.
- Kristoffer Nimark & Jarkko Jääskelä, 2008.
"A medium-scale open economy model of Australia,"
Economics Working Papers
1210, Department of Economics and Business, Universitat Pompeu Fabra.
- Macallan, Clare & Millard, Stephen & Parker, Miles, 2008. "The cyclicality of mark-ups and profit margins for the United Kingdom: some new evidence," Bank of England working papers 351, Bank of England.
When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp2010-03. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew)
If references are entirely missing, you can add them using this form.