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The study has tested the empirical validity of the open economy New Keynesian Phillips curve (NKPC) model with Pakistan’s data over the period 1972 to 2012. The estimates of the open economy hybrid NKPC reveal that although both the lagged period inflation and future inflation are statistically significant but the coefficient of lagged period inflation is quantitatively larger than the expected inflation which means that the price setting behavior is dominantly backward looking in Pakistan. Furthermore, the output gap has proved to be inflation forcing variable in the country. Finally, the inflation dynamics of Pakistan seem to be strongly influenced from the external factors like terms of trade and trade openness. The findings of the study suggest that the open economy NKPC can be used as a benchmark model for understanding the inflation behaviour in Pakistan.
Fatima Riffat, AbidaYousaf, Tahir Mukhtar. (2016) INFLATION DYNAMICS AND NEW KEYNESIAN PHILLIPS CURVE: AN OPEN ECONOMY PERSPECTIVE FOR PAKISTAN, Journal of the Punjab University Historical Society, Volume 29, Issue 1.
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