Is There a Horizontal Segment in the Phillips Curve? Peru 2005–2017

This study examines whether the presence of a relatively horizontal segment in the Phillips curve can explain a weak response in aggregate inflation. It is based on a semi-structural linear model for regional Phillips curves, in which the parameter associated with the output gap in the aggregate curve is identified, even though compensatory monetary policy actions follow an optimal rule. The nonlinear version of this regional model allows the relationship between inflation and the output gap to change continuously, depending on the range of variation in the output gap, and it is possible for the regional Phillips curve to contain a relatively horizontal segment. The empirical evidence (i) does not support the hypothesis that the main parameter is zero in the linear models and in the nonlinear model that considers regional heteroscedasticity, and (ii) only the nonlinear model that assumes regional homoscedasticity supports the hypothesis that a horizontal segment exists.