The New Keynesian Phillips Curve in multiple quantiles and the asymmetry of monetary policy

Abstract

This paper empirically explores the New Keynesian Phillips Curve (NKPC) in multiple quantiles and examines the uncertainty structure of the inflation process focusing on its relation to the asymmetry of monetary policy. We propose a multi-quantile version of the Generalized Method of Moments using the Laplace-type estimator. The empirical findings support the canonical NKPC with larger coefficients for marginal cost and expected inflation in the upper quantiles of the inflation distribution, while the hybrid NKPC fits better with the mid and lower quantiles. Accordingly, the risk of high inflation, measured by the right side tail of the conditional density, is more responsive to a change in expected inflation compared with the center and the left side. These results imply that monetary policy affects the future path of inflation in an asymmetric way, such that a tightening of monetary policy reduces high-inflation risks more than what we expect based on the point path, whereas the effect of expansionary policy on downside risk is minor. We also perform structural break tests and find that the model is unstable through 1983. There is a moderate change in the post-break data such that the downside risk of inflation becomes less responsive to expected inflation, which may reduce the cost of contractionary monetary policy.