Stability of Phillips Curve: The Case of Croatia

Zdravko Sergo, Darko Saftic and Ana Tezak

Economic Research-Ekonomska Istraživanja, 2012, vol. 25, issue S1, 65-85

Abstract: Phillips curves are generally estimated under the assumption of linearity and parameter constancy. The conventional Phillips curve argues that there is a trade-off or negative relationship between unemployment and inffation or wage inffation. According to Lucas’s critique of econometrics’ empirics, however, there is no parameter stability in the forward–looking economic behaviour model of economic agents. Since the rational expectation theory revolution linear models of inffation have been criticised for their poor forecasting performance. Bai and Perron (1998), proposed the methodology which allows for an unknown number of breaks at unknown dates as a response to the mentioned problem. The purpose of this paper is to investigate the linearity and constancy assumptions of the augmented Phillips curve model using expected inffation variables and the methodology proposed by Bai and Perron and to validate the Phillips curve using Croatia as an example. Data used in this analysis was on quarterly basis from 1994 to 2010.

Date: 2012
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DOI: 10.1080/1331677X.2012.11517557

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