Location of Repository

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

Abstract

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: oai:lra.le.ac.uk:2381/7529

Suggested articles

Preview

Citations

  1. (2000). A computational approach to finding causal economic laws. doi
  2. (2008). A note on the new Keynesian Phillips curve in a time-varying coefficient environment: some European evidence. doi
  3. (2005). An open economy new Keynesian Phillips curve for the U.K. doi
  4. (2002). Assessing nominal income rules for monetary policy with model and data uncertainty. doi
  5. (1988). Causality and causal laws in economics. doi
  6. (1979). Causality and econometrics. doi
  7. (2003). Econometric analysis, 5 th edition, Upper Saddle River,
  8. (1992). Efficient computation of stochastic coefficient models. In: doi
  9. (2005). Estimating New-Keynesian Phillips curves: a full information maximum likelihood approach. doi
  10. (2008). Estimation of parameters in the presence of model misspecification and measurement error. doi
  11. (2006). Financial innovations and macroeconomic volatility. doi
  12. (1999). Inflation dynamics: a structural econometric approach. doi
  13. (2006). Inflation inertia in the New Keynesian model. doi
  14. (2003). Interest and prices. doi
  15. (1997). Is inflation sticky?
  16. (2007). Methods of distinguishing between spurious regressions and causality.
  17. (2006). Monetary shocks and inflation dynamics in the New Keynesian model. doi
  18. (2003). Monetary theory and policy, doi
  19. (2005). New tests of the New Keynesian Phillips curve. doi
  20. (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy. doi
  21. (1988). On the interpretation and observation of laws. doi
  22. (1995). Random coefficient models: theory and applications. doi
  23. (2001). Random coefficient models. In: doi
  24. (1999). Recent developments in monetary policy analysis: The roles of theory and evidence. doi
  25. (2004). Risk and uncertainty in monetary policy. doi
  26. (2005). Robustness of the estimates of the hybrid New Keynesian Phillips curve. doi
  27. (1974). Spurious regressions in econometrics. doi
  28. (1983). Staggered prices in a utility-maximizing framework. doi
  29. (1997). The (un)importance of forward –looking behavior in price setting. doi
  30. (2007). The new Keynesian Phillips curve and inflation expectations: re-specification and interpretation. Economic Theory, doi
  31. (1988). University of Leicester, UK and Bank of Greece George Hondroyiannis, Bank of Greece and Harokopio
  32. (2005). What caused the decline in U.S. business cycle volatility? doi
  33. (2005). Where did the productivity growth go? Inflation dynamics and the distribution of income: comments. doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.