New Keynesian Phillips Curve for Pakistan

Abstract

Following Gali and Gertler (1999), we have estimated the New Keynesian Phillips Curve (NKPC) for Pakistan over the period 1976-2006. The results indicate significance of the forward-looking component in determining inflation along with the fact that real marginal cost, and not output gap, is the driving force of inflation. Results of Hybrid NKPC show that inflation does not possess backward inertia; rather it is dominated by forward-looking behaviour. Along with these results, the degree of price stickiness in Pakistan is found to be very high, while the fraction of firms using the backward-looking rule in price setting is quite low. © The Pakistan Development Review.