Empirical examination of the stability of Expectations-Augmented Phillips Curve for developing and developed countries

TL;DR

This study empirically examines the stability of the expectations-augmented Phillips Curve across 41 countries from 1980 to 2016, highlighting differences between developed and emerging markets and the impact of inflation volatility.

Contribution

It provides a comprehensive cross-country analysis of the Phillips Curve's validity and stability over time, emphasizing the role of inflation expectations and country-specific factors.

Findings

Inflation became more forward-looking after 1990.

Developed markets exhibit more forward-looking inflation expectations.

The Phillips Curve fails in countries with high and volatile inflation.

Abstract

The empirical literature provides mixed results on the relationship between inflation and unemployment, therefore, there is no consensus on validity and stability of the Phillips Curve. It also seems to be closely related with country-specific factors and the examination time periods. Considering the importance of this trade-off for policy-makers, this study aims to examine validity and stability of expectations-augmented Phillips Curve across 41 countries focusing on three different time periods between 1980 and 2016. The study documents several findings both in country-specific and in panel estimation analysis. First, we find that forward-looking characteristic of inflation picks up weight after 1990's which indicates that inflation became more sensitive to the expected prices. Second, we observe that inflation in developed markets is more forward-looking comparing to emerging and frontier markets. This indicates that developed markets dear forward-looking price expectations more than other markets. Third, we find that that both forward- and backward-looking Phillips Curve fails to work in Brazil, Greece, Indonesia, Mexico, South Africa, Romania, and Turkey. We address it to their long history of high and volatile inflation.