Flattening of the Phillips curve and the role of the oil price: An unobserved component model for the USA and Australia

We used the unobserved component model of Harvey (1989, 2011) to estimate the Phillips curve for the USA and Australia, augmenting it with the oil price. Our results show that while the coefficient of demand pressure and the intercept decreased, the coefficient of the oil price increased. Therefore, the oil price is likely to play a significant role in future inflation rates.

► Phillips curve augmented with oil prices is estimated for USA and Australia. ► Unobserved component model approach (Harvey, 2011) is used. ► There is evidence of reduction in the level component and the output gap coefficient. ► The coefficient of oil price has shown an increasing trend. ► Policies aimed to reduce the oil dependence are important for future inflation rates.