Three essays on inflation dynamics and oil economics in the context of the New Keynesian Phillips Curve

• Main Author: Mardaneh, Somayeh
• Other Authors: Zhang, Qiang; Hall, Stephen; Charemza, Wojciech
• Published: University of Leicester 2013
• Subjects: 330.15
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.579225

In the first chapter, the structural stability of the hybrid New Keynesian Phillips Curve (NKPC) and possible changes in pricing behaviour of firms is investigated in the context of oil price shocks. Using quarterly US aggregate data, this curve is estimated in subsamples formed with oil shock dates by generalized method of moments (GMM) and continuously updated GMM (CU-GMM). The standard GMM estimates suggest that although the forward-looking behaviour is predominant in pre-oil shock period, it loses ground against backward-looking behaviour after every oil shock. The CU-GMM results confirm the structural instability of hybrid NKPC in presence of oil shocks but now forward-looking behaviour becomes more important after oil shocks. In the second chapter, the structural stability of the NKPC featuring evolving trend inflation derived by Cogley and Sbordone’s (2008) is tested by exploiting three major oil shocks and three macroeconomic regimes. This is estimated by adapting two-step procedure combining Bayesian vector autoregression with minimum distance estimation. The results suggest that when a large and persistent macroeconomic shock sets off a large and sudden increase in trend inflation, backward-looking becomes more rational. When we impose continuous evolving trend inflation across macroeconomic regimes known as Great Inflation, Great Moderation, and Great Recession, the estimates of firm pricing parameters implies a structurally stable NKPC. In the final chapter, a small open economy NKPC is derived and estimated for a developing oil-exporting economy sick with Dutch-Disease. This curve is estimated for standard closed and open economy specifications of the Iranian economy. Introducing open economy elements produces three differences in the estimation. First, the degree of price stickiness and the fraction of backward-looking firms decrease. Second, the degree of substitutability between inputs is close to unity for Iranian economy. Third, the forward-looking behaviour gains ground while the backward-looking behaviour becomes less important.