Abstract:
This article utilizes the continuous wavelet transform and its associated tools to provide novel evidence regarding fundamental questions about the Phillips curve in the Iranian economy: slope stability, the role of expectations, and the long-run trade-off. The results indicate that the output gap's impact coefficient on inflation is not constant. Specifically, a positive effect was observed in the short run (2008-2010), while a negative effect was observed in the medium run (2000-2004) and the long run (1995-2004). Inflation expectations positively and significantly influence inflation in both the short and medium runs (2004-2013), but this effect becomes insignificant in the long run. Consequently, the slope of the Phillips curve is deemed unstable: it is negative only in the long run (1995-2004). Therefore, expectations cannot be considered a determining factor for inflation in the long run.
Machine summary:
Estimating the Phillips Curve in the Iranian Economy: New Evidence Based on Time-Frequency Analysis Mohammadali Ahsani 1 , Saleh Tahery Bazkhane * and 2 , Hadi Keshavarz 3 1.
* Corresponding Author Article Information Abstract The present paper uses continuous wavelet transform and its tools to provide new evidence from the Iranian economy regarding fundamental questions related to the Phillips curve (slope stability, the role of expectations, and the long-term trade-off).
Watson 8 (2014) and Blanchard (2018) show that while inflationary expectations in the micro New Keynesian Phillips curve are not based on long-term expectations, anchoring expectations had important consequences for inflation dynamics, leading to a reduction in inflation persistence and a loss of the role of inflation lags.
Considering the phase difference, it can be said that the coefficient of inflationary expectations in the Phillips curve is only positive and significant in the years 1384-1392 in the short term.
Therefore, the coefficient of the output gap in the Phillips curve in the long-term horizon is negative and is only interpretable and significant in the time period of 1374-1383.
2) Expectations have a significant effect in the short and medium term, but are not determinants of changes in inflation in the Phillips curve in the long term.
Although the slope of the Phillips curve is unstable and has a lot of variability in terms of intensity and slope direction in the time-frequency domain, important policy recommendations can be made: 1) In the Iranian economy, it is not possible to control the growth of the general price level by influencing inflationary expectations.
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