INFLATION DYNAMICS IN THE CZECH REPUBLIC: NEW EVIDENCE ON THE COST-BASED HYBRID NEW KEYNESIAN PHILLIPS CURVE

JAKUB SZABÓ^[1]

PETER JANČOVIČ^[2]

https://doi.org/10.53465/ER.2644-7185.2022.2.129-148

Abstract: New Keynesian form of the Phillips Curve assumes a short-term trade-off between inflation and real economic activity, either in unit labour cost or output gap specification. Extending the New Keynesian Phillips Curve (NKPC) with a backward-looking price setting, our aim is to examine the impact of the inflation expectations, lagged inflation, unit labour cost, import prices and real effective exchange rate on the inflation dynamics in the Czech Republic between 2000M1 and 2020M12. Dealing with non-stationary and cointegrated time series, we opted for an Error Correction Model (ECM) and an Autoregressive Distributed Lag (ARDL) model with the variables integrated of order I(1). ARDL model in differences was also compared with an ARDL model in levels. The main findings of our analysis can be summarized as follows. Firstly, our analysis indicates that the ARDL model using non-stationary time series generates spurious regression results. Secondly, the results from the ECM model and the ARDL model with first order differencing find the inflation expectations and unit labour cost statistically significant, confirming the existence of a small open economy NKPC for the Czech Republic. Thirdly, even though the backward-looking inflation setting represents a cornerstone of the hybrid NKPC, we have found no evidence for lagged inflation to have an impact on the inflation dynamics in the Czech Republic between 2000M1 and 2020M12. We thereby reject the hybrid version of the NKPC. Lastly, in spite of the Czech Republic representing a small open economy, we observed weak statistical evidence suggesting that external factors (exchange rate, import prices) influence the inflation dynamics in the Czech Republic.

Keywords: New Keynesian Phillips Curve, inflation expectations, real marginal cost

JEL Classification: C32, E31, E61

Fulltext: PDF

Online publication date: 20 June 2022

To cite this article (APA style):

Szabó, J., & Jančovič, P. (2022). Inflation Dynamics in the Czech Republic: New Evidence on the Cost-Based Hybrid New Keynesian Phillips Curve. Ekonomické rozhľady – Economic Review, 51(2), 129 – 148. 

https://doi.org/10.53465/ER.2644-7185.2022.2.129-148

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

^[1] Jakub Szabó, University of Economics in Bratislava, Slovak Republic, e-mail: jakub.szabo@euba.sk,  https://orcid.org/0000-0002-6003-8778

^[2] Peter Jančovič, University of Economics in Bratislava, Slovak Republic, e-mail: peter.jancovic@euba.sk,  https://orcid.org/0000-0002-1470-9163