Flattening Phillips Curve in Korea: The Role of Median Inflation

This paper examines the flattening of the Phillips curve in Korea and investigates the factors underlying the weak relationship between inflation and aggregate real activity. Using a standard expectations-augmented Phillips curve framework, the empirical analysis provides robust evidence of a flattening Phillips curve across various measures of inflation and real activity. However, when median inflation is used as the inflation measure, rather than traditional core inflation measures that exclude specific items, the evidence of flattening becomes notably weaker. Median inflation filters out the transitory effects of supply shocks on headline inflation across sectors, which traditional core inflation measures fail to do. These findings suggest that the Phillips curve relationship may still hold in Korea.