Modeling the Phillips Curve with Unobserved Components
نویسنده
چکیده
The relationship between ination and the output gap can be modeled simply and e¤ectively by including an unobserved random walk component in the model. The dynamic properties match the stylized facts and the random walk component satis es the properties normally required for core ination. The model may be generalized to as to include a term for the expectation of next periods output, but it is shown that this is di¢ cult to distinguish from the original speci cation. The model is tted as a single equation and as part of a bivariate model that includes an equation for GDP. Fitting the bivariate model highlights some new aspects of unobserved components modeling. Single equation and bivariate models tell a similar story: an output gap two per cent above trend is associated with an annual ination rate that is one percent above core ination. KEYWORDS: Cycle; hybrid new Keynesian Phillips curve; ination gap; Kalman lter, output gap.
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