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A Theory‐Based, State‐Dependent Phillips Curve and its Estimation
Author(s) -
Lee HsiuYun,
Wu JyhLin,
Chen ShowLin
Publication year - 2005
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1093/ei/cbi013
Subject(s) - phillips curve , economics , unemployment , econometrics , inflation (cosmology) , shock (circulatory) , markov chain , supply shock , imperfect competition , keynesian economics , state space , empirical evidence , monetary policy , macroeconomics , mathematics , microeconomics , physics , statistics , medicine , philosophy , epistemology , theoretical physics
To explain the existing empirical irregularity about the slope of a Phillips curve, this article provides a model of imperfect competition to show that the slope of a Phillips curve is shock‐dependent. We empirically apply a state‐space, Markov‐switching model to examine the impact of inflation surprise on the unemployment gap, resulting in the state‐dependent Phillips curve fitting quite well. Our empirical evidence indicates that an unexpected monetary expansion does produce effects in reducing unemployment rates and that supply shocks should not be ignored in estimating the Phillips curve because they dominate demand shocks in several nonoil shock periods.