Abstract
The paper deals with the estimation of the New Keynesian Phillips curve (NKPC). First, the history of the Phillips curve and the NKPC is outlined. Next, similar research and papers regarding the NKPC are mentioned. The main goal of the paper is to estimate the parameters of the NKPC using the Bayesian techniques. These techniques are widely used for the DSGE model estimation and this paper contains links to the source foreign literature. The NKPC is estimated as part of a fully calibrated Small Open Economy (SOE) DSGE model. The SOE DSGE model consists of households, firms, the government and the central bank. The estimation is performed on the Czech data and the period is from 2001Q1 to 2012Q2. The first output of the paper is the parameter estimates of the NKPC. The main finding is that the future expected inflation plays a crucial role in setting the level of inflation. Moreover, a shock decomposition of domestic and imported inflation is performed and the main output is that the domestic monetary policy shock causes crucial changes in the level of both domestic and imported inflation.
Highlights
In the last fifty years since Phillips (1958) first pointed to a possible relationship between unemployment and price and wage inflation, the Phillips curve has become one of the most intensely debated topics in macroeconomics
The New Keynesian Phillips curve (NKPC) is estimated as part of a fully calibrated Dynamic Stochastic General Equilibrium (DSGE) model of the Small Open Economy (SOE)
The paper deals with the estimate of the NKPC, which is formulated and estimated as part of the SOEDSGE model
Summary
In the last fifty years since Phillips (1958) first pointed to a possible relationship between unemployment and price and wage inflation, the Phillips curve has become one of the most intensely debated topics in macroeconomics. Results from single equation methods include Galí and Gertler (1999) and Galí, Gertler and López-Salido (2001), who claim that a hybrid New Keynesian Phillips curve, including both expected future inflation and lagged inflation, explains well the inflationary process in the US and the EU economy. They estimate different versions of the curve using the General Method of Moments (GMM) and find that the purely forward-looking version is rejected. The impact of all stochastic shocks on domestic and imported inflation is discussed
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