Application of the New Keynesian Phillips Curve Inflation Model in Sri Lanka
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This paper sets out to construct an economic model of inflation for Sri Lanka to understand price dynamics in the country.
The working paper applied the New Keynesian Phillips Curve (NKPC) framework to nonfood inflation in Sri Lanka during January 2006-April 2015. It differs from other papers on NKPC in three ways: (i) inflation defined as a month-on-month increase in the price index to avoid base effect; (ii) monthly output gap is estimated from power generation data to ensure sufficient number of data for regressions; and (iii) nominal effective exchange rate, global commodity prices, and domestic fuel prices are included into explanatory variables to capture supply-side impact on prices. With all these features, the paper confirmed that the forward-looking NKPC model is applicable to Sri Lanka.
Contents
- Introduction
- Background
- New Keynesian Phillips Curve (Nkpc)
- Data and Methodology
- Regression Results
- Conclusions and Next Steps
- References
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