On the Nature and the Stability of the Canadian Phillips Curve

Abstract

This paper empirically determines why, during the 1990s, inflation in Canada was consistently more stable than predicted by the fixed-coefficients Phillips curve. A time-varying-coefficient model, where all the parameters adjust simultaneously, shows that the behaviour of expectations was probably a major contributing factor. A decrease in the value of the coefficient on the first difference of the output gap also seems to have influenced the observed pattern of inflation. Finally, pass-through of relative price shocks into domestic prices is shown to have been low since 1983.