Simple four-step procedure of parabolic B curve determination for OECD countries in 1990Q1–2015Q4

Abstract

In theory the short-term relationship between inflation and GDP rate is known as the positive slope straight line SAS. In practice it is reflected by a concave non-monotonic function. The results of estimation depend on unusual observations. We propose a simple four-step procedure: first, basic estimation based on all observations; then estimation having ignored outliers; next, estimation on the average GDP rates for given inflation rates for the same observations; lastly, estimation skipping outlying averages. Empirical analysis for 26 OECD countries on quarterly data brought satisfactory results. They justified the determination of optimal GDP rate and corresponding inflation for every country. Finally, recommendations for policymakers have been formulated.