Estimates of the New Keynesian Phillips Curve for Pakistan

  • Kalim HyderEmail author
  • Stephen G. Hall


This paper presents estimates of the New Keynesian Phillips Curve (NKPC) for the agriculture, manufacturing and services sectors of Pakistan’s economy. The real marginal cost—derived from dynamic translog cost function—labour share of income and output gap are the indicators of economic activity along with past and expected inflation to determine inflation dynamics in each sector. The estimates of the structural parameters of the NKPC are consistent with economic theory in most of the models. Within-sample forecast performance and diagnostic tests indicate that the derived measure of real marginal cost performs better relative to the specifications with labour share of income or output gap. Further, the NKPC based on restrictive Cobb–Douglas production technology with labour input only does not perform better than the models that considers more inputs and intermediate cost. Our results show that the manufacturing is forward-looking sector followed by services and agriculture sectors.


Inflation Phillips curve Real marginal cost Pakistan 

JEL Classification

E31 E32 E47 E52 


Compliance with ethical standards

Conflict of interest

The authors declare that they have no conflict of interest.

Ethical approval

This article does not contain any studies with human participants or animals performed by any of the authors.


  1. Allen C, Urga G (1999) Interrelated factor demands from dynamic cost functions: an application to the non-energy business sector of the UK economy. Economica 66(263):403–413Google Scholar
  2. Anderson GJ, Blundell RW (1982) Estimation and hypothesis testing in dynamic singular equation systems. Econometrica 50(6):1559–1571Google Scholar
  3. Batini N, Jackson B, Nickell S (2005) An open-economy New Keynesian Phillips Curve for the UK. J Monet Econ 52(6):1061–1071Google Scholar
  4. Bernanke BS (2007) Inflation expectations and inflation forecasting. In: Speech at the monetary economics workshop of the National Bureau of Economic Research Summer Institute, Cambridge, Massachusetts. Accessed 30 June 2015
  5. Byrne JP, Kontonikas A, Montagnoli A (2013) International evidence on the New Keynesian Phillips Curve using aggregate and disaggregate data. J Money Credit Bank 45(5):913–932Google Scholar
  6. Census of Manufacturing Industries of Pakistan (2006) Census of manufacturing industries. Pakistan Bureau of Statistics, Government of Pakistan, IslamabadGoogle Scholar
  7. Christensen LR, Jorgenson DW, Lau LJ (1973) Transcendental logarithmic production frontiers. Rev Econ Stat 55(1):28–45Google Scholar
  8. Christiano LJ, Eichenbaum M, Evans CL (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. J Polit Econ 113(1):1–45Google Scholar
  9. Diewert WE (1974) Application to duality theory. In: Intriligator M, Kindrick D (eds) Frontiers in quantitative economics, vol II. North-Holland, Amsterdam, pp 169–199Google Scholar
  10. Dupuis D (2004) The New Keynesian hybrid Phillips curve: an assessment of competing specifications for the United States. Staff working paper 2004-31, Bank of CanadaGoogle Scholar
  11. Eakin B Kelly, McMillen DP, Buono MJ (1990) Constructing confidence intervals using the bootstrap: an application to a multi-product cost function. Rev Econ Stat 72(2):339–344Google Scholar
  12. Gali J, Gertler M (1999) Inflation dynamics: a structural econometric analysis. J Monet Econ 44(2):195–222Google Scholar
  13. Gali J, Gertler M, David Lopez-Salido J (2001) European inflation dynamics. Eur Econ Rev 45(7):1237–1270Google Scholar
  14. Gali J, Gertler M, David Lopez-Salido J (2005) Robustness of the estimates of the hybrid New Keynesian Phillips Curve. J Monet Econ 52(6):1107–1118Google Scholar
  15. Gordon RJ (2011) The history of the Phillips curve: consensus and bifurcation. Economica 78(309):10–50Google Scholar
  16. Hall SG, Nixon J (1999) A consistent approach to modelling dynamic factor demands. Centre for Economic Forecasting, London Business School, LondonGoogle Scholar
  17. Hall S, Nixon J (2000) Unemployment and the capital stock: a dynamic structural model of the UK supply side. Econ Model 17(3):415–437Google Scholar
  18. Imbs JM, Jondeau E, Pelgrin F (2007) Aggregating Phillips curves. Technical report 07-06. European Central BankGoogle Scholar
  19. Lau LJ (1974) Application to duality theory: a comment. In: Intriligator M, Kindrick D (eds) Frontiers in quantitative economics, vol II. North-Holland, Amsterdam, pp 169–199Google Scholar
  20. Lau LR, Christensen DW, Jorgenson LJ (1971) Conjugate duality and the transcendental logarithmic production function. Econometrica 4:255–256Google Scholar
  21. Leith C, Malley J (2007) A sectoral analysis of price-setting behavior in US manufacturing industries. Rev Econ Stat 89(2):335–342Google Scholar
  22. MacKinnon JG (1991) Critical values for cointegration tests in long-run economic relationships. Oxford University Press, New YorkGoogle Scholar
  23. Malikane C (2014) A new Keynesian triangle Phillips curve. Econ Model 43:247–255Google Scholar
  24. Malikane C, Mokoka T (2014) The New Keynesian Phillips Curve: endogeneity and misspecification. Appl Econ 46(25):3082–3089Google Scholar
  25. Mazumder S (2010) The New Keynesian Phillips Curve and the cyclicality of marginal cost. J Macroecon 32(3):747–765Google Scholar
  26. McCallum B (1976) Rational expectations and the natural rate: some consistent estimates. Econometrica 44:43–52Google Scholar
  27. Neiss KS, Nelson E (2005) Inflation dynamics, marginal cost, and the output gap: evidence from three countries. J Money Credit Bank 37(6):1019–1045Google Scholar
  28. Norkute M (2015) Can the sectoral New Keynesian Phillips Curve explain inflation dynamics in the Euro Area? Empir Econ 49(4):1191–1216Google Scholar
  29. Pakistan Economic Survey (2013) Pakistan economic survey. Ministry of Finance, Government of Pakistan, IslamabadGoogle Scholar
  30. Pakistan Energy Yearbook (2013) Pakistan energy yearbook. Hydrocarbon Development Institute of Pakistan, Ministry of Petroleum and Natural Resources, Government of Pakistan, KarachiGoogle Scholar
  31. Petrella I, Santoro E (2012) Inflation dynamics and real marginal costs: new evidence from US manufacturing industries. J Econ Dyn Control 36(5):779–794Google Scholar
  32. Politis DN (2003) The impact of bootstrap methods on time series analysis. Stat Sci 18(2):219–230Google Scholar
  33. Roberts JM (1995) New Keynesian economics and the Phillips curve. J Money Credit Bank 27(4):975–984Google Scholar
  34. Roodman D (2009) A note on the theme of too many instruments. Oxford Bull Econ Stat 71(1):135–158Google Scholar
  35. Saeed SK, Riaz K (2012) Phillips curve: forward or backward looking? World Appl Sci J 16(4):516–522Google Scholar
  36. Satti AUH, Malik WS, Saghir G (2007) New Keynesian Phillips curve for Pakistan. Pak Dev Rev 46(4-II):395Google Scholar
  37. Sbordone AM (2002) Prices and unit labor costs: a new test of price stickiness. J Monet Econ 49(2):265–292Google Scholar
  38. Shea J (1997) Instrument relevance in multivariate linear models: a simple measure. Rev Econ Stat 79(2):348–352Google Scholar
  39. Singh K (1981) On the asymptotic accuracy of Efron’s bootstrap. Ann Stat 9(6):1187–1195Google Scholar
  40. Urga G, Walters C (2003) Dynamic translog and linear logit models: a factor demand analysis of interfuel substitution in US industrial energy demand. Energy Econ 25(1):1–21Google Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Monetary Policy DepartmentState Bank of PakistanKarachiPakistan
  2. 2.The University of Leicester School of BusinessLeicesterUK
  3. 3.University of PretoriaPretoriaSouth Africa

Personalised recommendations