Sources and Channels of Nonlinearities and Instabilities of the Phillips Curve: Results for the Euro Area and Its Member States

Karsten Reichold, Martin Wagner, Milan Damjanovic and Marija Drenkovska
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Karsten Reichold: Department of Statistics, TU Dortmund University and Department of Economics, University of Klagenfurt
Milan Damjanovic: Bank of Slovenia, Ljubljana
Marija Drenkovska: Bank of Slovenia, Ljubljana

No 40, IHS Working Paper Series from Institute for Advanced Studies

Abstract: This paper presents evidence for sources and channels of nonlinearities and instabilities of the new Keynesian Phillips curve (NKPC) for the euro area and all but four member states over the last two decades prior to the COVID-19 crisis. The approach rests upon misspecification testing using auxiliary regressions based on the standard open-economy hybrid NKPC. Using a large number of specifications, this approach allows to systematically, i. e., based on a literature review, disentangle the evidence for nonlinearities and instabilities of the NKPC according to sources and channels. For the euro area and most considered member states, there is substantial evidence for nonlinearities and instabilities. The relatively most important channels of nonlinearities and instabilities are similar across countries, whereas the relatively most important sources differ across countries. The results strongly indicate the need for considering nonlinear NKPC relationships in empirical analyses and also point towards potentially useful nonlinear specifications.

Keywords: Euro area; instability; new Keynesian Phillips curve; nonlinearity; specification analysis (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 F62 J11 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2022-06
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://irihs.ihs.ac.at/id/eprint/6179 First version, 2022 (application/pdf)

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