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A New Structural Analysis of Inflation and Economic Activity

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  • Jun Gao

    (University College Cork, Ireland)

  • Sheng Zhu

    (University College Cork, Ireland)

Abstract

We theoretically investigate the role of expectations in modelling economic activity and the evolution of inflation rates. The New Keynesian Phillips-IS model is extended in our study by having two types of firms with a fraction of firms that uses ?limited? information to develop their expectations. The remaining firms, which are referred to as forward-looking, would use all information available to set prices and make manufacturing budgets. Then we use UK data to examine the robustness of our extension. To estimate our augmented model, we employ the Uhlig (2005) priori restrictions and the Nakajima (2011a) time-varying parameter regression. Our results suggest that the expectations of each type of firms play an important role in explaining the inflation rate and real economic growth in the UK.

Suggested Citation

  • Jun Gao & Sheng Zhu, 2019. "A New Structural Analysis of Inflation and Economic Activity," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 8(1), pages 35-51, June.
    • Handle: RePEc:sek:jijoes:v:8:y:2019:i:1:p:35-51
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    References listed on IDEAS

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    More about this item

    Keywords

    Phillips curve; IS curve; expectations; time-varying parameter regression;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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