Title: Sources and channels of nonlinearities and instabilities of the Phillips curve in the Euro area and its member states
Authors: Karsten Reichold - University of Klagenfurt (Austria)
Martin Wagner - University of Klagenfurt, Bank of Slovenia and Institute for Advanced Studies, Vienna (Austria) [presenting]
Milan Damjanovic - Bank of Slovenia (Slovenia)
Marija Drenkovska - Bank of Slovenia (Slovenia)
Abstract: Evidence is presented for sources and channels of nonlinearities and instabilities of the new Keynesian Phillips curve (NKPC) for the euro area and all but four member states over the last two decades prior to the COVID-19 crisis. The approach rests upon misspecification testing using auxiliary regressions based on the standard open-economy hybrid NKPC. Using a large number of specifications, this approach allows to systematically, i. e., based on a literature review, disentangle the evidence for nonlinearities and instabilities of the NKPC according to sources and channels. There is substantial evidence for nonlinearities and instabilities for the euro area and most considered member states. The relatively most important channels of nonlinearities and instabilities are similar across countries, whereas the relatively most important sources differ across countries. The results strongly indicate the need for considering nonlinear NKPC relationships in empirical analyses and also point towards potentially useful nonlinear specifications.