Estimates of New Keynesian Phillips Curve: Observations Based on the case of Korea

Abstract

Recently, an apparent flattening of New Keyneisan Phillips Curve (NKPC) has been indicated not only in the United States but also in many other small open economy countries including Canada, New zealand, U.K, and Korea. The implications of such phenomenon concedes the costs of trade-offs between the inflation and output gap variability, in which inflation has become less responsive to the variability of domestic macroeconomic activities. This paper's main objective is to discover some of evidences and conceivable explanations behind this structural flattening of New Keynesian Phillips Curve in Korea. We estimate a dynamic stochastic general equilibrium(DSGE) model of a small open economy to investigate such changes by employing Bayesian estimation methodology. Using data for Korea, we find that the flattening of New Keynesian Phillips Curve has become evident, however

the slope of New Keynesian Phillips Curve does not seem monotonically decreasing when it comes to the rolling window estimation analysis. We consider various reasons for this structural flattening including problems with data and estimation methodology and finally implement few robustness checks.