Inflation dynamics in the Czech Republic: Estimation of the New Keynesian Phillips curve

This paper challenges previous empirical evidence on output-inflation trade-off described in the hybrid New Keynesian Phillips curve. I estimate key coefficients of the hybrid gap-based New Keynesian Phillips curve, with both the forward- and backward-looking inflation components, in the Czech Republic for the periods 2000Q1 - 2012Q4 using Kalman filtration. My findings come to surprising conclusions that (i) output gap has a (statistically) significant impact on Czech inflation dynamics (ii) there is a reversal in behavior of Czech agents, where share of forward-looking agents predominates over backward-looking ones in the Czech Republic and (iii) Czech inflation might be significantly driven by change in import prices. In addition, all my results come statistically significant and correctly sign-oriented, which contradicts majority of existing empirical evidence on output-inflation trade-off in the Czech Republic.