Estimation of New Keynesian Phillips Curve in Malaysia

Abstract

This paper aims to estimate new Keynesian Phillips curve (NKPC) in Malaysia using the output gap as the proxy for the marginal cost. For this purpose, it employed three econometric methods, namely the ordinary least square (OLS), the two-stage least square (TSLS) and the generalized method of moments (GMM). This paper also estimated two types of the NKPC provisions, namely the baseline NKPC and the hybrid NKPC in its estimation. The empirical findings from the baseline NKPC and the hybrid NKPC offered a consistent conclusion that there is statistically significant price stickiness in Malaysia. In other words, the NKPC model seems to offer a good approximation to estimate the inflation dynamics in Malaysia.