Are Phillips curves in CESEE still alive and well behaved?

This paper estimates Phillips curve relationships using nonparametric vector autoregressions for four Central, Eastern and Southeastern European (CESEE) economies. The novel feature of our model, which builds on Bayesian additive regression trees, is that it allows for unveiling possible asymmetries with respect to the size and sign of structural shocks. We simulate how unexpected movements in the unemployment rate impact inflation measures across the countries under consideration. We provide evidence that the reactions of inflation to labor market shocks are highly asymmetric: Small shocks trigger no statistically significant response of inflation whereas larger shocks induce strong, significant and persistent reactions for all countries in our sample. When focusing on differences between positive and negative unemployment shocks, we find that benign shocks lead to stronger price reactions than adverse movements in unemployment rates. These results all highlight substantial nonlinearities in the dynamic relationship between unemployment rates and inflation rates.