Estimated New Keynesian Phillips Curves (NKPC) Model in Dynamic Inflation Based on Panel Data Perspective in ASEAN

Abstract

The development of the theory of dynamic inflation begins by linking wage inflation and unemployment. In further developments, factor of expectation is classified into inflation model. In measuring the factor of expectation emerges a debate about the use of variable lag inflation or expectation inflation. Lag variable represents the backward-looking behavior while expectation inflation represents the behavior of forward looking. The study used inflation data is important for ASEAN, because ASEAN is one of the strengths of the international economy. This study analyzes the dynamics of inflation in the ASEAN using framework the New-Keynesian Phillips Curve (NKPC) model. The data used is the quarterly panel data from 10 ASEAN members in the period 2005.I - 2013.IV.The study of this dynamic inflation applies quarter to quarter inflation data, meaning that the inflation rate is the percentage change in the general price of the current quarter compared to last quarter general price divided by the last quarter. The empirical results are estimated by using the Generalized Method of Moment (GMM), both of the system and first different indicates that the pattern formation of inflation expectations are backward-looking and forward-looking. In addition, the estimated NKPC models show the backward-looking behavior is more dominant than the forward looking. Changes in inflation are not entirely influenced by expectations of inflation in each country. Changes in inflation are also influenced by the output gap, changes in money supply, and exchange rate. Based on the findings of this study, it can be concluded that the NKPC models can explain the dynamics of inflation in each country in the ASEAN region. Significance of parameter estimates backward-looking, forward-looking, and the output gap indicate that the hypothesis of this model is proved to be true. However, the hypothesis that the forward looking behavior is more dominant than backward looking is not found.