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

The paper investigates whether the existence of a relatively horizontal section in the Phillips curve can explain a low reaction of aggregate inflation. The paper starts with the linear semi-structural model for regional Phillips curves, where the parameter associated with the output gap in the aggregate curve is identified despite the fact that offsetting monetary policy actions follow an optimal rule. The paper then proposes a nonlinear version of this regional model that allows a changing inflation-output gap relationship that depends on the range of variation of the output gap, which allows for the existence of a relatively horizontal section in the regional Phillips curve. The empirical evidence (i) does not favor the hypothesis that the main parameter is null in the linear models and in the non-linear model that considers regional heteroskedasticity, and (ii) only the non-linear model that assumes regional homoskedasticity supports the hypothesis that there is a horizontal section. (Audio: Department of Economic Publications)