New tests of the new-Keynesian Phillips curve

Abstract

Is the observed correlation between current and lagged inflation a function of backward-looking inflation expectations, or do the lags in inflation regressions merely proxy for rational forward-looking expectations, as in the newKeynesian Phillips curve? Recent research has attempted to answer this question by using instrumental variables techniques to estimate "hybrid" specifications for inflation that allow for effects of lagged and future inflation. We show that these tests of forward-looking behavior have very low power against alternative, but non-nested, backward-looking specifications, and demonstrate that results previously interpreted as evidence for the new-Keynesian model are also consistent with a backward-looking Phillips curve. We develop alternative, more powerful tests, which find a very limited role for forward-looking expectations. JEL classification code: E31

Exact Prediction of Inflation and Unemployment in Japan

“…Since 1958, the concept related to the Phillips curve has undergone numerous revisions. A good review of the current status quo is given by Rudd and Whelan (2005). As discussed above, we obtained different results when modeling the Phillips curve in developed countries.…”

Intrinsic and Inherited Inflation Persistence

“…18 Using a somewhat different methodology, Rudd and Whelan (2005) develop estimates of γ that are often an order of magnitude smaller than this.…”

Estimating the New Keynesian Phillips Curve by Quantile Regression Method for Turkey

“…Nevertheless, there are studies which emphasize that forward-looking specifications are not sufficient to capture inflation persistence (Fuhrer and Moore [11], Roberts [12] and Roberts [13], Rudd and Whelan [14,15] and Stock Watson [16]). Ball [17] demonstrates that the model yields the surprising result that announced, credible disinflations lead booms rather than recessions.…”

“…GMM estimates of the models suggest that forward looking term is dominant which means the coefficient on expected inflation rate substantially exceeds the coefficient on lagged inflation rate, moreover, lagged inflation is statically insignificant. On the other hand, Rudd and Whelan [14,15], Stock and Watson [16] and Nason and Smith [30] found that forward-looking term plays a very limited role in explaining inflation dynamics. Because of these empirical results, and the inflation rate is generally written as a linear combination of the expected inflation, lagged inflation and real marginal costs which is called Hybrid NKPC.…”