Examining the Philips Curve Collapse for Iranian Economy after the Great Recession

The relationship between real activity of an economy and the rate of inflation is one of the noteworthy issues in the field of macroeconomic. The majority of economic literature has focused on the use of the Philips curve in order to discover and clarify the the relationship between the real economic activity and the rate of inflation. The first Phillips curve has been criticized in the theoretical grounds, but in response to these criticisms, various forms of Phillips curve has developed; in which New Keynesian Philips Curve (NKPC) is one of them. Several types of research show that the Phillips curve relationship seemed to have broken down during the Great Recession. The basis for this argument is the observation that real activity dropped sharply without generating a corresponding drop in inflation. In this research, we use a dynamic stochastic general equilibrium (DSGE) approach and by applying NKPC we test this hypothesis for the Iranian economy. According to the results, there is a sharp drop in output without a corresponding decline in inflation.