Abstract
This paper examines the role of inflation expectations in Solomon Islands, a Pacific Island Country, using the Hybrid New Keynesian Phillips Curve model. The study applies the Generalized Method of Moments to estimate the Hybrid New Keynesian Philips Curve model using quarterly time series data for the period 2003–2017. The study confirms the existence of a Hybrid New Keynesian Philips Curve for Solomon Islands and finds that both backward-looking and forward-looking processes matter for inflation. Fuel prices and output gap are important indicators of current inflation. The study highlights key areas to further investigate including the weak monetary transmission mechanism and to examine the exchange rate pass through effect onto domestic prices. Studies on the role of inflation expectations in small, open, economies of the Pacific, such as Solomon Islands, is limited. This paper fills this void in literature by using quarterly time-series data to build a Hybrid New Keynesian Philips Curve model for Solomon Islands.
Highlights
The results show that fuel prices and output gap are important indicators of current inflation
Modelling the HNKPC is important as it contains information about adaptive and rational expectations which are crucial for policy analysis
Expected inflation and past inflation plays a significant role in determining the current inflation and it is important for the Central Bank to incorporate these dynamics into the inflation forecasting model for Solomon Islands
Summary
Solomon open economy economy with with population populationof ofaround around652858. Average economy was badly affected by the period of political instability, resulting in an average growth of negative 6.6 per cent over the period These four years of conflict disrupted the growth of negative. In July 2003, the arrival of the Regional Assistance Mission to the Solomon Islands (RAMSI) led to restored law and order, increased business confidence coupled with the injection of donor inflows towards the country’s post-conflict recovery efforts. All of these enabled the economy to find stable footing again.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
