There are two identification problems that can occur when the Phillips curve is estimated using time-series data. First, inflation expectations and labor market conditions are correlated to cost-push shocks (error term of the Phillips curve), causing an endogeneity problem in the estimating equation. Next, if a central bank conducts an optimal monetary policy under the theoretical assumption that the Phillips curve holds, the inflation rate observed in actual data reflects only the impact of cost-push shocks.

According to recent studies, if the Phillips curve is estimated using regional panel data. even when a central bank carries out an optimal monetary policy, regional demand shocks are not fully offset, making it possible to estimate the relationship between demand shocks and prices. In addition, since cost-push shocks can be controlled through fixed effects, the endogeneity in the estimating equation can be significantly mitigated.

The analysis results of this paper are as follows. First, the job openings rate and the consumer price index (CPI) in Korea vary widely by region. While the nationwide job openings rate has a higher concentration in some ranges, the regional job openings rate shows more of a normal distribution. Second, the slope of Korea’s Phillips curve varies significantly depending on whether cost-push shocks are controlled. When such shocks are not controlled, the slope of the Phillips curve is only 0.01. When they are controlled, however, the slope rises to 0.56. These findings imply that labor market conditions and prices are still closely correlated.