Inflation dynamics and the New Keynesian Phillips Curve: an identification robust econometric analysis
Article [Version of Record]
Is part of
Cahier de recherche ; no. 2005-17.Publisher(s)
Université de Montréal. Département de sciences économiques.Affiliation
Keywords
- macroeconomics
- inflation dynamics
- New Keynesian Phillips Curve
- identification robust inference
- weak instruments
- optimal instruments
- [JEL:C12] Mathematical and Quantitative Methods - Econometric and Statistical Methods: General - Hypothesis Testing
- [JEL:C13] Mathematical and Quantitative Methods - Econometric and Statistical Methods: General - Estimation
- [JEL:C3] Mathematical and Quantitative Methods - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors
- [JEL:C52] Mathematical and Quantitative Methods - Econometric Modeling - Model Evaluation and Selection
- [JEL:E3] Macroeconomics and Monetary Economics - Prices, Business Fluctuations, and Cycles
- [JEL:E31] Macroeconomics and Monetary Economics - Prices, Business Fluctuations, and Cycles - Price Level; Inflation; Deflation
- [JEL:C12] Mathématiques et méthodes quantitatives - Économétrie et méthodes statistiques; généralités - Tests d'hypothèses
- [JEL:C13] Mathématiques et méthodes quantitatives - Économétrie et méthodes statistiques; généralités - Estimations
- [JEL:C3] Mathématiques et méthodes quantitatives - Méthodes en économétrie; modèles à équations multiples et simultanées
- [JEL:C52] Mathématiques et méthodes quantitatives - Modélisation économétrique - Évaluation de modèles et tests
- [JEL:E3] Macroéconomie et économie monétaire - Prix, fluctuations des affaires, inflation et cycles économiques
- [JEL:E31] Macroéconomie et économie monétaire - Prix, fluctuations des affaires, inflation et cycles économiques - Niveau des prix, inflation, déflation
Abstract(s)
In this paper, we use identification-robust methods to assess the empirical adequacy of a New Keynesian Phillips Curve (NKPC) equation. We focus on the Gali and Gertler’s (1999) specification, on both U.S. and Canadian data. Two variants of the model are studied: one based on a rationalexpectations assumption, and a modification to the latter which consists in using survey data on inflation expectations. The results based on these two specifications exhibit sharp differences concerning: (i) identification difficulties, (ii) backward-looking behavior, and (ii) the frequency of price adjustments. Overall, we find that there is some support for the hybrid NKPC for the U.S., whereas the model is not suited to Canada. Our findings underscore the need for employing identificationrobust inference methods in the estimation of expectations-based dynamic macroeconomic relations.
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