Original scientific paper

STABILITY OF PHILLIPS CURVE: THE CASE OF CROATIA

Zdravko Šergo
Darko Saftić
Ana Težak

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 inflation or wage inflation. 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 inflation 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 inflation 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.

Keywords

Structural changes; Inflation; Nominal wages; Unemployment; Phillips curve; Croatia

Hrčak ID:

103227

URI

https://hrcak.srce.hr/103227

Publication date:

1.10.2012.

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