A Theory-Based, State-Dependent Phillips Curve and its Estimation

Hsiu-Yun Lee, Jyh-Lin Wu and Show-Lin Chen

Economic Inquiry, 2005, vol. 43, issue 1, 194-205

Abstract: 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. (JEL C51, E24, E52) Copyright 2005, Oxford University Press.

JEL-codes: C51 E24 E52 (search for similar items in EconPapers)
Date: 2005
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