A hybrid NKPC inflation model for the small Island state of Fiji

Abstract

This study models (consumer price) inflation for an open small island state of Fiji. We introduce, within a hybrid open-economy version of the New Keynesian Phillips Curve (NKPC) model, the effects of development in the stock market, and frequent sources of economic and political uncertainty on inflation. Using monthly data over the period for the period February 1996 to December 2020, we show that a model with expectations of forward- and backward-looking economic agents alone can explain 85% inflation. Other NKPC variables have explanatory power of 10% boost this to 27% relationships in the hybrid NKPC model. Overall, the study implies that inflation expectations of economic agents, if managed effectively, can avoid persistently high inflation rates.