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The New Keynesian Phillips Curve and Lagged Inflation: A case of spurious correlation?

By Stephen G. Hall, George Hondroyiannis, P. A. V. B. Swamy and George S. Tavlas


The New Keynesian Phillips Curve and Lagged Inflation:\ud A Case of Spurious Correlation? Stephen G. Hall Leicester University and Bank of Greece George Hondroyiannis Bank of Greece and Harokopio University P.A.V.B. Swamy U.S. Bureau of Labor Statistics\ud George S. Tavlas† Bank of Greece Abstract The New Keynesian Phillips Curve (NKPC) specifies a relationship between inflation and a forcing variable and the current period's expectation of future inflation. Most empirical estimates of the NKPC, typically based on Generalized Method of Moments (GMM) estimation, have found a significant role for lagged inflation, producing a “hybrid” NKPC. Using U.S. quarterly data, this paper examines whether the role of lagged inflation in the NKPC might be due to the spurious outcome of specification biases. Like previous investigators, we employ GMM estimation and, like those investigators, we find a significant effect for lagged inflation. We also use time varying-coefficient (TVC) estimation, a procedure that allows us to directly confront specification biases and spurious relationships. Using three separate measures of expected inflation, we find strong support for the view that, under TVC estimation, the coefficient on expected inflation is near unity and that the role of lagged inflation in the NKPC is spurious

Topics: New Keynesian Phillips Curve, time-varying coefficients, spurious relationships
Publisher: Dept. of Economics, University of Leicester
Year: 2008
OAI identifier:

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