The New Keynesian Phillips curve in Europe: does it fit or does it fail?

Abstract

The canonical New Keynesian Phillips curve specifies inflation as the present-value of future real marginal costs. This paper exploits projections of future real marginal costs generated by VAR models to assess the model’s ability to match the behavior of actual inflation in the Euro area. The model fits the data well at first sight. A set of bias-corrected bootstrapped confidence bands, however, reveals that this result is consistent with both a well fitting and a failing model. These findings also hold for the hybrid version of the Phillips curve.