To Be, or Not to Be - Is the Phillips Curve Evident in the BRICS Countries? : A study on the validity of the Phillips curve during exogenous shocks

Sammanfattning

The aim of this paper is to examine the validity of the Phillips curve in the five BRICS countries - Brazil, Russia, India, China and South Africa - under U.S. monetary policy uncertainty, while also including monetary policy cycles of the U.S. Federal Reserve and the European Central Bank, respectively. We used ARMA (p,q) and GARCH (p,q) to model inflation and local projections to find the impulse response of U.S. monetary policy uncertainty on the relationship between output and inflation. We found evidence for a Phillips curve in Brazil, Russia and South Africa when including the Fed's monetary policy cycles in the analysis, albeit flattened, and for Brazil and South Africa when the ECB's monetary policy cycles were included. This leaves us with a non-existing Phillips curve in India and China in both cases. The impact of the Fed's and the ECB's monetary tightening cycles was examined, and the results showed that the region with the largest share of trade with each of the BRICS countries also impacted domestic inflation to a greater extent. Furthermore, we found that the impulse response of U.S. monetary policy uncertainty on the Phillips curve in the BRICS countries is higher under the Fed's monetary tightening cycles than during the Fed's monetary easing cycles. The policy implications of the results include considering whether the Phillips curve should be used for inflation modeling in open economies, as other factors than output tend to have a larger impact on inflation. Additionally, the asymmetric effect of uncertainty during the Fed's monetary tightening should also be considered.