Research On New Keynesian Phillips Curve And Effects Of Monetary Policy

In market economy, unemployment rate and inflation rate are two important macro-economic indexes, and play a significant role when the government is formulating macroeconomic policies. So the Phillips Curve which describes the relationship between unemployment and inflation becomes an important part of macro-economy and becomes a useful tool for macro-economy control. This paper tries to set up a new Phillips Curve which will be applicable for China and provide theoretical foundation for policy analysis and choice.To begin with, this paper reviews the development of Phillips Curve, compares and evaluates the traditional Phillips Curve and the new Phillips Curve. Then, based on the New Keynesian economy theories, this paper establishes a new model called New Keynesian Phillips Curve, including inflation expectation, inflation inertia, the real marginal cost of labor (or real GDP gap), and the marginal cost of international oil, by Cobb-Douglas production function which contains two variables of labor and oil. Applying OLS estimates, the paper finds an appropriate New Keynesian Phillips Curve for China with the quarterly data from 1993 to 2008. From the empirical analysis, we can conclude that simple inflation expectation is still suitable in China and it is the most important factor that affects the present inflation. The real marginal cost of labor has time delay effect, the lag one of it performs a positive effect on the inflation, and the effects of the current real GDP gap, the lag one of the real GDP gap and the marginal cost of international oil are all insignificant. The effect of inflation inertia is significant which can explain about 20 percents of the inflation volatility.Secondly, this paper studies the Phillips Curve under the impact of monetary policy, and Optimizes the New Keynesian Phillips Curve. The paper adds the real interest rate which is the proxy variable of monetary policy into the model to further analyse the effects of monetary policy on the inflation by using OLS estimates. The study results show that the fitting effect is better than the initial Phillips Curve Model, but the direct effects of the monetary policy are very small, instead, the indirect effects are important. By comparing the initial model and the model which adds the real interest rate, we can find that the symbols are consistent in these two models, which can also show that there is a stable New Keynesian Phillips Curve in China.In order to discuss the impact of monetary policy on inflation better, the paper explains the effects brought by monetary policy by unlinear LSTR Model under the New Keynesian Phillips Curve. The conclusions are that the monetary policy, in itself, has little effect on inflation. However, under the indirect effects of monetary policy, the effects of the real marginal cost of labor, inflation expectation and inflation inertia to inflation all decrease greatly. At the same time, the effects of monetary policy on inflation can be divided into three kinds:asymmetry effect, time delay effect, and threshold effect.In the end, the paper returns to the principles of the New Keynesian economy and gives a further confirmation that the New Keynesian Phillips Curve based on the New Keynesian model is of theoretical and practical significances. The existent and stable New Keynesian Phillips Curve can reveal the present status of economic operation in China, and provide the government with a basis for economic decision-making. Meanwhile, the effectiveness of monetary policy ensures that the macro-economic managements can solve economic problems, promote price stability, full employment, economy growth and security and harmony of the whole society.