Philips Curve and Inflation in the Philippines Question
How well does the Phillips Curve describe the inflation process in Philippines?
Answer this question by estimating the equation used in the Kamber Mohanty, Morley paper:
- For your own country
- Using ANNUAL data
- Using data from IMF
- Using data from central bank of Philippine
- Using data from The world bank
- (Anywhere you can find the data)
This is the equation which, in addition to the domestic output gap, contains lagged inflation, global output gap, the percent change in the nominal exchange rate, and the percent change in USD oil prices. If you do not have an independent measure of expected inflation, please drop this variable from the regression.
= Annual inflation rate
= Expected inflation (Drop this variable if you do not have an independent measure for your country
= Domestic output gap (in percent). (Use a centered moving average of real GDP as potential output if you don’t have any other measure of potential GDP)
= ‘Global’ output gap. The file Output gap.xls contains four measures that you may use: one each for the US, France, and Germany as well as the average of the three. Use only one of them at the time. These data come from the WEO Data Base April 2021. You may use any of these or, any other measure that you think is more appropriate.
= The percentage change in your country’s exchange rate relative to the USD, or relative to a trade-weighted average if you think it is more appropriate, and if it is easy to find.
= The percentage change in an international price of oil. The attached file (from FRED) contains the nominal USD price per barrel of Brent crude oil. You may use this to construct the percentage change. The file is called POIL.xls
- Estimate the model for the 2000 to 2015, and describe and comment on the results.
- Use the model to forecast inflation for 2016 – 2020. Use the actual values of the independent variables for those years when you calculate your forecast.
PLEASE NOTE: It is possible that the model does not explain the data as well as you might wish. Do not take this as a failure. Remember, what you are doing is giving an answer to the question ‘How well does the Phillips Curve describe the inflation process in Philippines However, if some results are not what you expect them to be based on the underlying theory, do try to speculate on why that is the case.