Degree Name

Master of Arts (MA)

Semester of Degree Completion

Spring 2019

Thesis Director

A. Desire Adom

Thesis Committee Member

Mukti Upadhyay

Thesis Committee Member

Ali Moshtagh

Abstract

The thrust of this research paper is to examine the inflation information that is contained in the output gap using the New Keynesian Phillips Curve framework. As informed by the model, the study also sets to investigate inflation persistence and the influence of forward inertia on the current inflation. This paper follows the Gali and Monacelli (2005) of the small open-economy type of model. However, the current study differs by introducing external factors (trade and real exchange rate) not only on the hybrid model, also on the backward, forward and the hybrid restricted models for time-series data (1971-2017) of all twenty (20) economies considered in the study. We adopt two measures of output gaps; the univariate (Hodrick Prescott) and the Multivariate (Kalman) gap estimation approaches and deploy instrument-based (Generalized Method of Moment & Two-Stage Least Square) and non-instrument based (Bayes and Ordinary Least Square) econometric techniques to generate the structural parameters. After estimating the results, we resolve that the developed economies' data appropriately fit the backward-looking model. Thus, the output gap mount pressure on the inflation processes in those economies and the inflation follows first autoregressive process; the past inflation. This study does not find strong supportive evidence on gap-inflation relationship in most of the emerging economies. The findings in the developing economies are not as much revealing but found few evidences. We could not ascertain a specific type of model for all these countries. Nigeria and Pakistan follow the backward model; Bangladesh follows hybrid model and Egypt; Indonesia and Kenya follow hybrid restricted type of model. Though, there was no doubt relationship exists in these highlighted economies, we could not technically ascertain consistencies as exhibited by the backward -looking models in the developed economies. We found inflation to be persistent in all economies. On the external factors, we completely support that trade and exchange rate enters the domestic inflation equation.

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