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Professor Pasquale Sgro and his doctoral candidate Syed Kanwar Abbas investigate the validity of the New Keynesian Phillips Curve (NKPC) for Australia in a paper recently published in Economic Modelling (28) 2011 pp-2022-33.
The NKPC was developed as a response to the New Classical critique that Keynesian macroeconomics lacked micro-foundations. The NKPC provides theoretical micro-foundations that attempt to explain, inter alia, nominal rigidities and, explicitly price stickiness.
In contrast to the findings for the USA and Euro area, Sgro and Abbas find that neither the output gap nor marginal cost appears to be a key driving force variable across different sets of instruments and estimators (GMM and 2SLS) over the sample period from 1959 to 2009.
The flattening of the NKPC along with significant presence of price stickiness is also found in the data. In particular, the reduced form coefficients and implied estimates from the structural parameters of the model support the view that inflation dynamics are forward looking while the role of lagged inflation is also statistically important only after the 1980s.
Sgro and Abbas claim that the forward -looking baseline NKPC contrary to the hybrid NKPC is stable and better explains inflation dynamics for the Australian economy.
The paper can be located at the Elsevier.