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An application of New Keynesian models to inflation in Croatia

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  • Domić Alan

    (Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia)

Abstract

Background: The inflation dynamics of Croatia is studied in the paper, with the review of applicable marginal cost proxies for the hybrid New Keynesian Phillips Curve (NKPC), and estimation of three specifications of the hybrid NKPC for Croatia. Objectives: The goal of this research is to examine the effect of labor's share of income, the price of energy, and the price of imports and other open economy factors in driving inflation in Croatia from the first quarter of 2000 to the fourth quarter of 2011. Methods/Approach: We use the generalized method of moments (GMM) estimator to empirically estimate three NKPC specifications. The J-stat and Cragg-Donald F-test are used to test for overidentification and for weak instruments, respectively. Results: We find that the marginal cost proxy for the energy-augmented specification is statistically significant and quantitatively the largest, whereas those for the other two are statistically significant, but quantitatively negligible. Conclusions: The results provide an empirical contribution both to the literature on inflation in Croatia and the literature of the NKPC in a small open economy. We can conclude that the price of energy has been the strongest driver of inflation, whereas the open economy factors we tested have had very little influence.

Suggested Citation

  • Domić Alan, 2012. "An application of New Keynesian models to inflation in Croatia," Business Systems Research, Sciendo, vol. 3(2), pages 6-13, September.
    • Handle: RePEc:bit:bsrysr:v:3:y:2012:i:2:p:6-13
    DOI: 10.2478/v10305-012-0008-y
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    References listed on IDEAS

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    1. Alexander Mihailov & Fabio Rumler & Johann Scharler, 2011. "The Small Open-Economy New Keynesian Phillips Curve: Empirical Evidence and Implied Inflation Dynamics," Open Economies Review, Springer, vol. 22(2), pages 317-337, April.
    2. Sylvia Kaufmann & Johann Scharler, 2009. "Bank-Lending Standards, the Cost Channel and Inflation Dynamics," Economics working papers 2009-16, Department of Economics, Johannes Kepler University Linz, Austria.
    3. Mazumder, Sandeep, 2010. "The new Keynesian Phillips curve and the cyclicality of marginal cost," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 747-765, September.
    4. Ichiro Muto, 2009. "Estimating A New Keynesian Phillips Curve With A Corrected Measure Of Real Marginal Cost: Evidence In Japan," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 667-684, October.
    5. Alexander L. Wolman, 1999. "Sticky prices, marginal cost, and the behavior of inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 29-48.
    6. Campbell Leith & Jim Malley, 2007. "Estimated Open Economy New Keynesian Phillips Curves for the G7," Open Economies Review, Springer, vol. 18(4), pages 405-426, September.
    7. Ivo Krznar, 2011. "An Analysis of the Domestic Inflation Rate Dynamics and the Phillips Curve," Working Papers 31, The Croatian National Bank, Croatia.
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