AN ESTIMATE OF THE HYBRID NEW-KEYNESIAN PHILLIPS CURVE FOR MOZAMBIQUE IN THE PERIOD 1993 TO 2023

Abstract

This paper estimates a Hybrid New Keynesian Phillips Curve (HNKPC) for Mozambique over the period 1993–2023 using annual macroeconomic data. The study examines the relative importance of forward-looking inflation expectations, past inflation, the output gap, and the exchange rate pass-through in explaining domestic inflation dynamics. The main specification is estimated using the Fuller (1) estimator, while 2SLS, two-step GMM (GMM-2), and LIML estimates are used as robustness checks. Alternative specifications are also considered with respect to the Newey-West bandwidth, the measure of the output gap, the instrument set, the treatment of output gap endogeneity, and the imposition of the long-run verticality restriction. In addition, inference procedures robust to weak instruments are employed.The results suggest that forward-looking inflation expectations play a more important role in Mozambique’s inflation dynamics than past inflation over the period analyzed, highlighting the importance of expectations formation and, potentially, the credibility and anchoring of monetary policy. The output gap has a sign opposite to that predicted by theory but is not statistically significant. This finding suggests limitations to relying exclusively on the output gap as an indicator of inflationary pressures in a small, open, and structurally vulnerable economy such as Mozambique. In contrast, the exchange rate pass-through is significant both economically and statistically, consistent with the exposure and vulnerability of a small, open developing economy to external prices, imported goods, and international cost shocks.