EVALUATION OF THE HYBRID NEW KEYNESIAN PHILLIPS CURVE FOR UKRAINE

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Authors: I. Fedorenko, PhD in Economics, Associate prof., ORCID ID 0000-0002-2851-6856, G. Chornous, Doctor of Sciences (Economics), Prof., ORCID ID 0000-0003-4889-1247, V. Pylypchuk Taras Shevchenko National University of Kyiv, Kyiv, Ukraine

Annotation:  The Hybrid New Keynesian Phillips Curve (HNKPC) was developed as a response to the apparent inertia in inflation the baseline New Keynesian Phillips curve leaved unexplained. Thus, the hybrid model combines two extreme cases – the traditional Phillips curve, and the purely forward-looking NKPC. The HNKPC also based on theoretical micro-foundations that aim to explain price stickiness and nominal rigidities. The paper is devoted to econometric testing and investigation the validity of the HNKPC (Calvo pricing model) for Ukraine.

We use both the output gap and the marginal cost as the relevant indicators of real economic activity to determine the most appropriate one for Ukraine. Using the monthly data for the period 2016–2020, the main object is to compare the impact of both forward- and backward-looking components on inflation dynamic. Results of estimation by the Generalized Method of Moments (GMM) show that inflation possess resistant backward inertia due to domination of backwardlooking behaviour. Our findings indicate that the degree of price stickiness in Ukraine is found to be quite low, while the fraction of firms using the backward-looking rule in price setting is rather high. These estimates seem plausible from an economic point of view but not optimistic in terms of inflation targeting. The results provide useful insights for inflation dynamics and can be useful for improving monetary policy efficiency in Ukraine

Keywords: inflation; inflation expectations; forward-looking expectations; backward-looking expectations; The Hybrid New Keynesian Phillips curve; HNKPC; instrumental variables; generalized method of moments.

Received: 12/07/2021
1st Revision: 26/07/2021
Accepted: 07/09/2021

DOI: https://doi.org/10.17721/1728-2667.2021/216-3/8

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