Instabilities in the New Keynesian Phillips curve: an empirical study for Brazil

Abstract

This paper analyzes the determinants of inflation in Brazil through the estimation of the New-Keynesian Phillips curve (NKPC) proposed by Blanchard and Galí (2007) and the hybrid version presented in Galí and Gertler (1999). We perform structural break tests in the NKPC coefficients to assess possible changes in the inflation dynamics between 2002 and 2015. The results show that: i) the structural break tests indicate a change in the coefficients of the NKPC; ii) the forward-looking component of inflation is dominant, though its importance has been reduced after 2004; iii) the unemployment rate has negatively affected inflation, although a reduction of this impact has been observed in recent years; iv) the inflationary effects of supply shocks decreased after the estimated structural break; v) the influence of output gap on current inflation has declined in recent years.