Testing for a Forward-Looking Phillips Curve. Additional Evidence from European and US data

The "New Keynesian" Phillips Curve (NKPC) states that inflation has a purely forward-looking dynamics. In this paper, we test whether European and US inflation dynamics can be described by this model. For this purpose, we estimate hybrid Phillips curves, which include both backward and forward-looking components, for major European countries, the euro area, and the US. Estimation is performed using the GMM technique as well as the ML approach. We examine the sensitivity of the results to the choice of output gap or marginal cost as the driving variable, and test the stability of the obtained specifications. Our findings can be summarized as follows. First, in all countries, the NKPC has to be augmented by additional lags and leads of inflation, in contrast to the prediction of the core model. Second, the fraction of backward-looking price setters is large (in most cases, more than 50 percent), suggesting only limited differences between the US and the euro area. Finally, our preferred specification includes marginal cost in the case of the US and the UK, and output gap in the euro area.Forward-looking Phillips curve, euro area, GMM estimator, ML estimator.

Generalized Taylor and Generalized Calvo Price and Wage-Setting: Micro Evidence with Macro Implications

The Generalized Calvo and the Generalized Taylor model of price and wage-setting are, unlike the standard Calvo and Taylor counter-parts, exactly consistent with the distribution of durations observed in the data. Using price and wage micro-data from a major euro-area economy (France), we develop calibrated versions of these models. We assess the consequences for monetary policy transmission by embedding these calibrated models in a standard DSGE model. The Generalized Taylor model is found to help rationalizing the hump-shaped response of inflation, without resorting to the counterfactual assumption of systematic wage and price indexation.contract length, steady state, hazard rate, Calvo, Taylor, wage-setting, price-setting

The Phillips curve at fifty

The Phillips curve is fifty years old. Since Phillips (1958)'s original contribution this econometric relationship has undergone many criticisms and evolutions. The Phillips curve yet remains a fundamental tool for inflation forecasting and monetary policy analysis. This paper reviews the various versions of the Phillips curve, using reearch carried out at the Banque de France for illustration purpose, and discusses the main issues associated with this relation.courbe de Phillips; inflation; salaires

Assessing GMM Estimates of the Federal Reserve Reaction Function

Estimating a forward-looking monetary policy rule by the Generalized Method of Moments (GMM) has become a popular approach since the influential paper by Clarida, Gali, and Gertler (1998). However , an abundant econometric literature underlines to the unappealing small- samples properties of GMM estimators. Focusing on the Federal Reserve reaction function, we assess GMM estimates in the context of monetary policy rules. First, we show that three usual alternative GMM estimators yield substantially different results. Then, we compare the GMM estimates with two Maximum-Likelihood (ML) estimates, obtained using a small model of the economy. We use Monte-Carlo simulations to investigate the empirical results. We find that the GMM are biased in small sample, inducing an overestimate of the inflation parameter . The two-step GMM estimates are found to be rather close to the ML estimates. By contrast, iterative and continuous-updating GMM procedures produce more biased and more dispersed estimators.Forward-looking model, monetary policy reaction function, GMM estimator , FIML estimator , small-sample properties of an estimator .

Restaurant Prices and the Minimum Wage

We examine the effect of the minimum wage on restaurant prices. We contribute to both the study of economic impact of the minimum wage and to the micro patterns of price stickiness. For that purpose, we use a unique dataset of individual price quotes collected to calculate the Consumer Price Index in France and we estimate a price rigidity model based on a flexible (S; s) rule. We find a positive and significant impact of the minimum wage on prices. The effect of the minimum wage on prices is however very protracted. The aggregate impact estimated with our model takes more than a year to fully pass through to retail prices.price stickiness, minimum wage, inflation, restaurant prices

Sticky wages: evidence from quarterly microeconomic data

This paper documents nominal wage stickiness using an original quarterly firm-level dataset. We use the ACEMO survey, which reports the base wage for up to 12 employee categories in French firms over the period 1998 to 2005, and obtain the following main results. First, the quarterly frequency of wage change is around 35 percent. Second, there is some downward rigidity in the base wage. Third, wage changes are mainly synchronized within firms but to a large extent staggered across firms. Fourth, standard Calvo or Taylor schemes fail to match micro wage adjustment patterns, but fixed duration "Taylor-like" wage contracts are observed for a minority of firms. Based on a two-thresholds sample selection model, we perform an econometric analysis of wage changes. Our results suggest that the timing of wage adjustments is not state-dependent, and are consistent with existence of predetermined of wage changes. They also suggest that both backward- and forward-looking behavior is relevant in wage setting. JEL Classification: E24, J3wage predetermination, Wage stickiness

Courbe de Phillips et modèle WS-PS:Quelques réflexions

Rompant avec la pratique empirique des courbes de Phillips caractérisées par une influence négative du taux de chômage sur le taux de croissance des salaires, les « nouvelles théories du chômage » ont voulu refonder le concept de taux de chômage d'équilibre à partir de courbes WS-PS, basées sur des modèles théoriques, où le taux de chômage joue négativement sur le niveau des salaires. Elles ambitionnent d'expliquer ainsi la croissance et la persistance du chômage de masse en Europe depuis vingt-cinq ans. Toutefois, l'existence et les déterminants d'une cible de long terme de salaire réel posent de délicats problèmes théoriques et empiriques ; aussi, les divers travaux de cette école fournissent-ils des explications contradictoires de la hausse du chômage.Breaking with the empirical practice of Phillips Curves characterised by a negative influence of the unemployment rate on growth rate of nominal wages, the « new unemployment theories » have tried to restate the concept of equilibrium rate of unemployment from WS-PS curves, based on theoretical and micro-economic works, in which the unemployment rate has a negative impact on the level of wages. They claim to explain the growth and the persistence of mass unemployment in Europe since 25 years. However, the existence and the features of the real wage target that are postulated by this approach set many delicate theoretical and empirical problems. Thus, the various works of this school give contradictory explanations of the rise of unemployment

Using Structural Balance Data to Test the Fiscal Theory of the Price Level: Some International Evidence

The fiscal theory of the price level has recently received important attention as an alternative theory of price determination. Empirical tests of the FTPL have been rare, and have undergone forceful criticism by Cochrane [Cochrane, J., 1998. A frictionless view of US inflation. NBER Macroeconomics Annual. MIT Press, pp. 323–384] based on “observational equivalence” arguments. This paper proposes two extensions to the empirics of the FTPL. First, we apply the methodology initiated by Canzoneri et al. [Canzoneri, M.B., Cumby, R.E., Diba, B.T., 2001. Is the price level determined by the needs of fiscal solvency? American Economic Review 91, 1221–1238] to European data. Second, we use structural balance data, in order to overcome Cochrane’s critique. Our conclusion is that for neither country the data support a FTPL interpretation

1958-2008, avatars et enjeux de la courbe de Phillips

The Phillips curve is fifty years old. Since Phillips (1958)'s original contribution this econometric relationship has undergone many criticisms and evolutions. The Phillips curve yet remains a fundamental tool for inflation forecasting and monetary policy analysis. This paper reviews the various versions of the Phillips curve, using reearch carried out at the Banque de France for illustration purpose, and discusses the main issues associated with this relation