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A Search for a Structural Phillips Curve*
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Abstract
The foundation of the New Keynesian Phillips curve is a model of price
setting with nominal rigidities which implies that the dynamics of inflation are
well explained by the evolution of real marginal costs. The objective of this paper
is to analyze whether this is a structurally-invariant relationship. To assess
this, we first estimate an unrestricted time-series model for inflation, unit labor
costs, and other variables, and present evidence that their joint dynamics are
well represented by a vector autoregression with drifting coefficients and volatilities,
as in Cogley and Sargent (2004). Then, following Sbordone (2002, 2003),
we apply a two-step minimum distance estimator to estimate deep parameters.
Taking as given estimates of the unrestricted VAR, we estimate parameters
of the NKPC by minimizing a quadratic function of the restrictions that the
theoretical model imposes on the reduced form. Our results suggest that it is
possible to reconcile a constant-parameter NKPC with the drifting-parameter
VAR, and therefore we argue that the price-setting model is structurally invariant.Inflation; Phillips curve; time-varying VAR.