Estimating the Hybrid New Keynesian Phillips Curve for Economy of Iran

Abstract

The short–term inflation dynamics and its cyclical interactions with real economic variables are basic issues in the context of monetary policies analysis. This study investigates and estimates the hybrid new Keynesian Phillips curve for Economy of Iran during 1971-2008. On this curve, the effective variables on current inflation would be future inflation, lagged inflation and GDP gap. This paper makes use of three Kalman, Hodrick- Prescott and band-pass filters to estimate GDP gap. There is a structural break in 1979 due to victory of the Islamic Revolution in Iran. Findings indicate that GDP gap has a significant positive impact on current inflation, which means the effectiveness of real variables, besides monetary policies, on inflation in the long-run. Our findings are consistent with other Phillips curve models, which confirm the effective role of output gap on current inflation. In addition, the coefficients of the expected inflation and lagged inflation variables are statistically significant, which indicate that firms look forward and backward in setting prices, but coefficient of expected inflation variable is higher than that of lagged inflation, means that firms pay more attention to the expected inflation in setting current prices. The evaluation tests indicate the accuracy and reliability of models.

Keywords

• hybrid new keynesian philips curve
• gdp gap
• inflation
• kalman filter
• hodrick- prescott filter
• band- pass filter