Eastern Illinois University The Keep Masters Theses Student Theses & Publications 2019 A Comparative Analysis on Output Gap - Inflation Relation: The ewN Keynesian Approach Oladimeji Tomiwa Shodipe TheGraduate School ..f) � IUJl'KXSl.JN IVf.RSITY. Thesis Maintenance and Reproduction Certificate FOR: Graduate Candidates Completing Theses in Partial Fulfillment of the Degree Graduate Faculty Advisors Directing the Theses RE: Preservation, Reproduction, and Distribution of Thesis Research Preserving, reproducing, and distributing thesis research is an important part of Booth Library's responsibility to provide access to scholarship. In order to further this goal, Booth Library makes all graduate theses completed as part of a degree program at Eastern Illinois University available for personal study, research, and other not-for­ profit educational purposes. 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A COMPARATIVE ANALYSIS ON OUTPUT GAP - INFLATION RELATION: THE NEW KEYNESIAN APPROACH TI ( TLE) BY OLADIMEJI TOMIWA SHODIPE THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS IN ECONOMICS IN THE GRADUATE SCHOOL, EASTERN ILLINOIS UNIVERSITY CHARLESTON, ILLINOIS 2019 YEAR I HEREBY RECOMMEND THAT THIS THESIS BE ACCEPTED AS FULFILLING THIS PART OF THE GRADUATE DEGREE CITED ABOVE os}10}\9 ?-/#-/p THESIS COMMI TTEE CHAIR DATE DEPARTMENT/SCHOOL DATE OR CHAIR'S DE$1CNEE S-$-!f' THESIS COMMITTEE DATE THESIS COMMITTEE MEMBER DATE �'1 DATE THESIS COMMITTEE MEMBER THESIS "1EMBER DATE A COMPARATIVE A COMPARATIVE ANALYSIS ON OUPUT GAP - INFLATON RELATION: TIIE NEW KENEYSIAN APPROACH Oladimeji Tomiwa Shodipe Eastern Illinois University 2019 Thesis Committee Dr. A Desire Adorn (Advisor) Dr. Mukti Upadhyay Dr. Ali Moshtagh Abstract 1be thrust of research paper is to examine the inflation information that contained in the tlm is output gap using the New Keynesian Phillips Curve frrurework. As informed by the mode� the study also sets to investigate inflation persistence and of forward the influence inertia on the C\llTent inflation paper follows the Monacelli (2005) of the small open-economy This Gali and type of model However, the c\llTent study differs by introducing external :factors (trade real and exchange rate) not only on the hybrid mode� also on the backward, forward the hybrid and restricted models for time-series data (1971-2017) of all twenty (20) economies considered in the study. We adopt two measures of output gaps; the tmivariate (Hodrick Prescott) and the Multivariate (Kalman) gap estirmtion approaches deploy instrument-based (Generalized and Method of Moment & Two-Stage Least Square) non-instrument based (Bayes and Ordinary and Least Square) econometric techniques to generate the structural parameters. After estimating the results, we resolve that the developed economies' data appropriately the backward-looking fit model Thus, the output pressure on the inflation processes in those economies the gap m:>tmt and inflation follows first autoregressive process; the past inflation. study does not find strong This supportive evidence on gap-inflation relationship in most of the emerging economies. 1be findings in the developing economies are not as much revealing but fotmd few evidences. We could not ascertain a specific type of model for all these cotmtries. Nigeria andPakistan follow the backward mode� Bangladesh follows hybrid model and Egypt; Indonesia andKenya follow hybrid restricted type of model Though, there was no doubt relationship exists in thesehighlighted economies, we could not technically ascertain consistencies as exhibited by the backward-looking models in the developed economies. We fotmd inflation to be persistent in all economies. On the external :factors, we completely support that trade andexchange rate enters the domestic inflation equation Acknowledgment I thank the Omniscient God for inputting in me His nature and seeing me through the thick of life. sincerely want to appreciate my research mentor, A. Desire Adorn, for his and thin I Dr. and during the writing also, I register my enonmus support supervision of this paper_ More gratitude to my thesis comnittee members, Dr. Mukti Upadhyay and Dr. Moshtagh, for their Ali massive contnbution in completing infl�ntial research project this immediate furnily members; Mr.&Mrs. Shodipe, Folake Adeyemo, I thank my Modupeoluwa Shodipe, Endurance Shodipe and Tosin Shodipe for their moral and financia I supports throughout master's degree program at EIU and my previous academic programs. my I sincerely express my gratitude to the Onayigas' for their profound kind gesture when I needed most during program God bless you in return it my To all irrnnediate past and current graduate students in the department of Economics, I you thank all ii Table of Contents CHAPTER ONE ...................... ............... ................ ........................................................................... 1 1.0 Introduction ..................... ........................................... .. .................................... ... ..... .............. 1 1.1 Justification of the Study ................... ............... .................................... .................................. 4 1.2 Objectives of the Study ................................... ........................................ ... ......................... ...5 1.3 Hypotheses......... .. ........................................... .. .. ......................................... .......................6 1.4 Organization of the Study .................... ... .. .................................. ....... ................................. 6 CHAPTER TWO........ .............................................. ..... ....................................... .. ......................... 7 2.0 Lite ratu re Review ...................... ...................................... ............................................ ............ 7 CHAPTER THREE ......................................................................................... ..... .......................... 21 3.1 Background Information on Inflation Behavior and Output Gap ........................................ .... 21 3.1.l Developed Economies.......................... .... ..... .... .... ........................................... .... 21 3.1.2 Eme rging Economies ........................ ........................... .. ..... ... .............................. 26 3.1 .3 Developing Economies................... ...... .... ....... ................................................. .... 28 CHAPTER FOUR ........................... .................................... .......... ....................... ...................... .. .. 33 4.0 Me thodologyand Data.... ..................... ..... ...................................................... ... ............ ...... 33 4.1 Methodology... ........................................................................ .. .... ..... ................................ 33 4.1.l Forward Loo king Model ....................................... ...... ....... ..................................... 34 4.1.2 Backward LookingMode I .......................... ....................... ..................................... 35 4.1.3 Hybrid Mode l........................................................................................................