Econometric Evaluation of the New Keynesian Phillips Curve*

Abstract

We give an appraisal of the New Keynesian Phillips curve (NPCM) as an empirical model of European inflation. The favourable evidence for NPCMs on euro-area data reported in earlier studies is shown to depend on specific choices made about estimation methodology. The NPCM can be re-interpreted as a highly restricted equilibrium correction model. We also report the outcome of tests based on variable addition and encompassing of existing models. The results show that economists should not accept the NPCM too readily.

Estimating the New Keynesian Phillips Curve for the UK: evidence from the inflation-indexed bonds market

“…However, GMM estimation is most likely to be biased in favor of an apparently dominant forward-looking behavior, irrespective of the true nature of the forward and backward-looking dynamics of inflation ( Mavroeidis 2005;Bårdsen, Jansen, and Nymoen 2004;Nason and Smith 2008;Jondeau and Le Bihan 2005). It is also possible to argue that the role of the forward-looking component may be affected by the choice of proxy used to capture aggregate demand pressures in the estimation.…”

“…Most existing studies use realized inflation or survey based inflation forecast in conjunction with Generalized Method of Moments (GMM) estimation or other instrument variable methods. 9 However, Bårdsen, Jansen, and Nymoen (2004), Mavroeidis (2005), and Nason and Smith (2008) discuss the limitations of GMM technique in forward-looking models that use large number of instruments and a general correction of the covariance matrix. These studies recommend against the indiscriminate applicability of GMM in estimating the NKPC since it is very likely to be either mis-specified or spuriously identified.…”

“…However, Bårdsen, Jansen, and Nymoen (2004) and many other studies show that using GMM for NKPC estimation may not be the best strategy since the model is likely to be either weakly identified or dynamically mis-specified. At the same time, in a separate but related strand of literature on asset pricing, studies have found that under certain conditions the inflation-indexed bonds market provides useful information for identifying expected inflation, which in turn is correlated with the actual inflation.…”

An estimation of the hybrid Phillips curve for Brazil in the inflation targeting regime

“…A especificação de Curva de Phillips previamente discutida tem sido empregada em diversos trabalhos, na economia brasileira, para avaliar a dinâ-mica da inflação e a magnitude dos coeficientes relacionados à inflação passada e a inflação futura, como em Alves & Areosa (2005), Bardsen & Jansen (2004), e Fanelli (2007. As novas teorias que surgiram para explicar a relação entre inflação e desemprego, entre as quais a teoria das expectativas racionais e a da NAIRU (Taxa de desemprego que mantêm a inflação constante), sinalizavam que a Curva de Phillips é vertical no longo prazo como abordam Portugal et al (1999), Lima (2000), Staiger et al (2001) e Ball & Mankiw (2002) 3 .…”

Monetary policy and asset prices: to respond or not?

“…The formation of expectations is treated as backward-looking, which is consistent both with a credible inflation-targeting regime and with recent econometric evaluations of New Keynesian Phillips Curves-see e.g. Bårdsen et al (2004Bårdsen et al ( , 2005. 3…”