6,753 research outputs found
Evolving Phillips trade-off
No full textWe characterise the evolution of the U.S. unemployment-inflation trade-off since the late XIX century era via a Bayesian time-varying parameters structural VAR. The Great Inflation episode appears as historically unique along several dimensions. In particular, the shape of the ‘Phillips loop’–which is defined in terms of the impulse-response functions of inflation and unemployment’s deviations from equilibrium–was, during those years, clearly out of line with respect to the rest of the sample period for all structural innovations except money demand shocks. During the Great Depression, on the other hand, the Phillips trade-off did not exhibit any peculiar qualitative feature, so that, when seen through these lenses, the 1930s only stand out because of the sheer size of the macroeconomic fluctuation. The historical evolution of the Phillips trade-off exhibits virtually no connection with the evolution of the extent of trade openness of the U.S. economy. Although, by itself, this does not rule out a possible impact of globalisation on the slope of the trade-off in recent years, it clearly suggests that, historically, the evolution of the trade-off has been dominated by factors other than trade openness. JEL Classification: E30, E32Bayesian VARs, Globalisation, Great Depression, Great Inflation, identified VARs, Lucas Critique, Phillips trade-off, stochastic volatility, time-varying parameters
Understanding the Flattening Phillips Curve
No full textPolicy-makers have recently noted an apparent flattening of the Phillips curve. The implications of such a change include that a positive output gap would be less inflationary, but the cost of reducing inflation, once established, would increase. This paper’s objective is to review the evidence and possible explanations for the flattening of the Phillips curve in the context of new-Keynesian economic theory. Using data for the United States and Australia, we find that the flattening is evident in the baseline ‘structural’ new-Keynesian Phillips curve. We consider a variety of reasons for this structural flattening, such as data problems, globalisation and alternative definitions of marginal cost, none of which is entirely satisfactory.Phillips curve; inflation
Inflation Forecasts and the New Keynesian Phillips Curve
No full textThe ability of the New Keynesian Phillips curve to explain US inflation dynamics when official central bank forecasts (Greenbook forecasts) are used as a proxy for inflation expectations is examined. The New Keynesian Phillips curve is estimated on quarterly data spanning the period 1970Q1-1998Q2 against the alternative of the Hybrid Phillips curve, which allows for a backward-looking component in the price-setting behavior in the economy. The results are compared to those obtained using actual data on future inflation as conventionally employed in empirical work under the assumption of rational expectations. The empirical evidence provides, in contrast to most of the relevant literature, considerable support for the standard forward-looking New Keynesian Phillips curve when inflation expectations are measured using official inflation forecasts. In this case, lagged inflation terms become insignificant in the hybrid specification. The usefulness of real unit labor cost as the preferred proxy for real marginal cost in recent empirical work on the Phillips curve is confirmed by our results.Money demand; Inflation; Phillips curve; Real marginal cost; Real-time data; GMM estimation
Measuring the Natural Output Gap Using Actual and Expected Output Data
No full textAn output gap measure is suggested based on a multivariate Beveridge-Nelson decomposition of output using a vector-autoregressive model that includes data on actual output and on expected output obtained from surveys. The gap is estimated using an integrated approach to identifying permanent and different types of transitory shocks to output. The gap has a statistical basis but is provided economic meaning by relating it to natural output in DSGE models. The approach is applied to quarterly US data over 1970q1-2007q4. Estimated gaps have sensible statistical properties and perform well in explaining inflation in estimates of New Keynesian Phillips curves.Trend Output, Natural Output Level, Output Gap, Beveridge-Nelson Decomposition, Survey-based Expectations, New Keynesian Phillips Curve.
The long run Phillips curve and the role of downward nominal wage rigidity in Tunisia
No full textThe long run Phillips curve has been a controversial topic for many economists such as Friedman (1968) and Lucas (1972) among others since the 70's. Many new studies concerning the impact of downward nominal wage resistance hypothesis on the long run Phillips curve have enriched the empirical literature. However, the essential idea of this study is to examine the evidence of this hypothesis and its impact on the long run Phillips curve in Tunisia. Relying on annual data covering the period 1962-2004, we estimate two models of the Phillips curve: one is standard and the other with downward nominal wage rigidity in which we are inspired by the works of Akerlof, Dickens and Perry (1996). We adopt two estimation methods: the Ordinary Least Square and the Non Linear Least Square. Our results suggest a possibility of a long run unemployment inflation trade off incorporating the downward nominal wage rigidity hypothesis.
Estimating open economy Phillips curves for the euro area with directly measured expectations
No full textThis paper examines euro area inflation dynamics by estimating open economy New Keynesian Phillips curves based on the assumption that all imports are intermediate goods. Instead of imposing rational expectations a priori, Consensus Economics survey data and OECD inflation forecasts are used to proxy inflation expectations. The results suggest that, compared with a closed economy New Keynesian Phillips curve, euro area inflation dynamics are better captured by the open economy specification. Moreover, in the open economy context, and even if we allow for persistence in expectations, the hybrid specification of the New Keynesian Phillips curve is needed in order to capture the euro area inflation process properly. We also provide some evidence that in recent years of low and stable inflation, euro area inflation dynamics have become more forward-looking and the link between inflation and domestic demand has weakened (ie the euro area Phillips curve has flattened). On the other hand, in low-inflation euro area countries the inflation process seems to have been more forward-looking already since the early 1980s.New Keynesian Phillips curve; open economy; expectations; euro area
The new Keynesian Phillips curve: empirical results for Luxembourg
No full textThe New Keynesian Phillips curve (NPC) differs from the conventional expectations-augmented Phillips curve in that it is forward-looking and links inflation to a measure of marginal cost instead of unemployment or the output gap. More fundamentally, the NPC is derived from New Keynesian models that combine nominal rigidities with individual optimising behaviour and model-consistent (rational) expectations. Because the NPC is grounded in micro-theory (unlike the conventional expectations-augmented Phillips curve), it is robust to some forms of the Lucas critique and may serve to analyse the impact structural changes such as increased price flexibility may have on inflation. New Keynesian Phillips curve estimates for Luxembourg using the Galí and Gertler (1999) hybrid form suggest that firms change prices often but tend to use backward-looking rules-of-thumb instead of resetting prices optimally using forward-looking expectations. In terms of policy implications, although the results suggest prices in Luxembourg are relatively flexible, the prevalence of backward-looking price setting implies greater inflation persistence and a higher sacrifice ratio attached to disinflationary monetary policy. From the perspective of individual firms, backward-looking price setting may be a rational response in a very small open economy because of its vulnerability to external shocks. Small size and openness plausibly imply higher costs of collecting information and lower benefits from optimal price setting.
Revisiting the empirical existence of the Phillips Curve for India
No full textThis paper revisits the empirical existence of the Phillips curve in the Indian context. To estimate the Phillips curve we need two variables – inflation and the output gap. In the case of India, incorrect measurement of both variables causes much difficulty in estimating the Phillipscurve. We use a non-linear Kalman filter approach to estimate the output gap and find that the Kalman filter estimate captures all the dynamics of the economy. Our results show that after taking supply shocks into consideration, there is clear evidence as to the existence of the Phillips curve in India for recent years.Kalman Filter; Output Gap; Inflation
Identifying the New Keynesian Phillips curve
No full textPhillips curves are central to discussions of inflation dynamics and monetary policy. New Keynesian Phillips curves describe how past inflation, expected future inflation, and a measure of real marginal cost or an output gap drive the current inflation rate. This paper studies the (potential) weak identification of these curves under generalized methods of moments (GMM) and traces this syndrome to a lack of persistence in either exogenous variables or shocks. The authors employ analytic methods to understand the identification problem in several statistical environments: under strict exogeneity, in a vector autoregression, and in the canonical three-equation, New Keynesian model. Given U.S., U.K., and Canadian data, they revisit the empirical evidence and construct tests and confidence intervals based on exact and pivotal Anderson-Rubin statistics that are robust to weak identification. These tests find little evidence of forward-looking inflation dynamics.
Inflation Convergence and the New Keynesian, Phillips Curve in the Czech Republic
No full textThe New Keynesian Phillips Curve has become an important part of modern monetary policy models. It describes the relationship between inflation and real marginal cost, which is derived from micro-founded models with rational expectations, sticky prices, and forward and backward looking behaviour. This answers the previous critique of the Phillips Curve. We estimate several specifications of the New Keynesian Phillips Curve for the Czech Republic between 1996 and 2009. We show that the GMM suffers under the problem of weak instruments leading to biased estimates. In turn, the FIML is robust and yields significant estimates of structural parameters implying a strong forward looking behaviour.inflation, New Keynesian Phillips Curve, marginal costs, output gap, real unit labour costs
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