The New Keynesian Phillips Curve with Myopic Agents

Abstract

Empirical estimations of the New Keynesian Phillips curve support hybrid versions with a positive weight on lagged infl ation and a weight less than one on expected infl ation. We argue that myopic price setting of some agents explains the low weight on expected infl ation. The lagged term can be explained by trend extrapolation if information about the future is costly. In a laboratory experiment we implement the Calvo (1983) microfoundations of the Phillips curve. Both of our hypotheses are supported by the experimental data. About half of the subjects set optimal Calvo prices while about a third is myopic.Hybrid Phillips curve; experimental economics; myopia; behavioral macroeconomics