Hybrid New Keynesian Phillips Curve Research Articles

Predicting inflation expectations: A habit-based explanation under hedging

One of the main challenges monetary policymakers face is predicting the trajectory of short-term inflation, especially considering the consistently flat Phillips curve observed in recent years. A promising approach to tackling this challenge involves modifying the hybrid New Keynesian Phillips curve (HNKPC) by incorporating a hedging factor. This factor accounts for the efforts risk-averse economic agents make to safeguard their spending decisions against uncertainties arising from inflation. Our study provides evidence that the hedging factor plays a crucial role and is a statistically significant predictor of the upcoming year's inflation rate. Specifically, a one-standard-deviation increase in the hedging factor predicts a positive rise in short-term inflation. Furthermore, we demonstrate that the hedging factor significantly determines the common component found in both well-known survey-based and model-based inflation expectation indicators.

A hybrid NKPC inflation model for the small Island state of Fiji

This study models (consumer price) inflation for an open small island state of Fiji. We introduce, within a hybrid open-economy version of the New Keynesian Phillips Curve (NKPC) model, the effects of development in the stock market, and frequent sources of economic and political uncertainty on inflation. Using monthly data over the period for the period February 1996 to December 2020, we show that a model with expectations of forward- and backward-looking economic agents alone can explain 85% inflation. Other NKPC variables have explanatory power of 10% boost this to 27% relationships in the hybrid NKPC model. Overall, the study implies that inflation expectations of economic agents, if managed effectively, can avoid persistently high inflation rates.

Inflation Dynamics in the Czech Republic: New Evidence on the Cost Based Hybrid New Keynesian Phillips Curve

New Keynesian form of the Phillips Curve assumes a shortterm trade-off between inflation and real economic activity, either in unit labour cost or output gap specification. Extending the New Keynesian Phillips Curve (NKPC) with a backward-looking price setting, our aim is to examine the impact of the inflation expectations, lagged inflation, unit labour cost, import prices and real effective exchange rate on the inflation dynamics in the Czech Republic between 2000M1 and 2020M12. Dealing with non-stationary and cointegrated time series, we opted for an Error Correction Model (ECM) and an Autoregressive Distributed Lag (ARDL) model with the variables integrated of order I(1). ARDL model in differences was also compared with an ARDL model in levels. The main findings of our analysis can be summarized as follows. Firstly, our analysis indicates that the ARDL model using non-stationary time series generates spurious regression results. Secondly, the results from the ECM model and the ARDL model with first order differencing find the inflation expectations and unit labour cost statistically significant, confirming the existence of a small open economy NKPC for the Czech Republic. Thirdly, even though the backward-looking inflation setting represents a cornerstone of the hybrid NKPC, we have found no evidence for lagged inflation to have an impact on the inflation dynamics in the Czech Republic between 2000M1 and 2020M12. We thereby reject the hybrid version of the NKPC. Lastly, in spite of the Czech Republic representing a small open economy, we observed weak statistical evidence suggesting that external factors (exchange rate, import prices) influence the inflation dynamics in the Czech Republic.

ОЦІНЮВАННЯ ГІБРИДНОЇ НЕОКЕЙНСІАНСЬКОЇ КРИВОЇ ФІЛЛІПСА ДЛЯ УКРАЇНИ

The Hybrid New Keynesian Phillips Curve (HNKPC) was developed as a response to the apparent inertia in inflation the baseline New Keynesian Phillips curve leaved unexplained. Thus, the hybrid model combines two extreme cases – the traditional Phillips curve, and the purely forward-looking NKPC. The HNKPC also based on theoretical micro-foundations that aim to explain price stickiness and nominal rigidities. The paper is devoted to econometric testing and investigation the validity of the HNKPC (Calvo pricing model) for Ukraine. We use both the output gap and the marginal cost as the relevant indicators of real economic activity to determine the most appropriate one for Ukraine. Using the monthly data for the period 2016–2020, the main object is to compare the impact of both forward- and backward-looking components on inflation dynamic. Results of estimation by the Generalized Method of Moments (GMM) show that inflation possess resistant backward inertia due to domination of backwardlooking behaviour. Our findings indicate that the degree of price stickiness in Ukraine is found to be quite low, while the fraction of firms using the backward-looking rule in price setting is rather high. These estimates seem plausible from an economic point of view but not optimistic in terms of inflation targeting. The results provide useful insights for inflation dynamics and can be useful for improving monetary policy efficiency in Ukraine

TRADE OPENNESS AND THE PHILLIPS CURVE: EVIDENCE FROM ASEAN COUNTRIES

A flattening of the Phillips curve in recent decades has attracted a considerable interest of researchers and central bankers. As trade openness might be among the main causes of this phenomenon, this study puts forward a testable ‘openness–Phillips curve’ hypothesis. Two methods — a static and a dynamic approaches — were employed to test the hypothesis by estimating slope coefficients of the new Keynesian Phillips curve (NKPC) and hybrid NKPC in ten ASEAN countries. A notable empirical finding is that in the periods of a higher trade openness, the Phillips curve tended to be flatter in the close economies and steeper in the open economies. These findings have some economic and political implications. The main one is that central banks in the ASEAN countries where the flattening of the Phillips curve takes place would not be able to employ the Phillips curve as an effective policy tool. Besides, countries with high inflation and unemployment rates could face some political uncertainty.

The Hybrid New Keynesian Phillips Curve with Multiple Lags of Inflation

In deriving the hybrid new Keynesian Phillips curve (HNKPC) in Galí and Gertler (1999) and Holmberg (2006), it is assumed that backward-looking firms index their prices to the average prices newly set last period plus last period’s inflation rate, resulting in a Phillips curve equation that relates current inflation to a demand variable, expected future inflation, and last period’s inflation. The present study generalizes the derivation of the HNKPC to allow firms to index prices to multiple lags of inflation, resulting in a HNKPC in which current inflation depends on multiple lags of inflation instead of only one lag of inflation, providing theoretical justification for empirical specifications of the HNKPC that include more than one lag of inflation.

Meta-Analysis of the New Keynesian Phillips Curve in Developed and Emerging Economies

ABSTRACTThe New Keynesian Phillips Curve (NKPC) has become an inherent part of modern monetary policy models. It is derived from micro-founded models with rational expectations, sticky prices, and forward and backward-looking subjects on the market. Reviewing about 200 studies, we analyze the weight of the forward-looking behavior in the hybrid NKPC by means of meta regression. We show that selected data and method characteristics have significant impact on reported results. Moreover, we find a significant publication bias including publications in top journals, while we document no bias for the most cited studies and the most cited authors.

Do global output gaps help forecast domestic inflation? Evidence from Phillips curves for Poland

This study confronts domestic and global views on inflation through the use of the Hybrid New Keynesian Phillips Curve (HNKPC) models estimated for headline and core inflation in Poland. We analyse the roles of the global vs. domestic output gaps in affecting price changes. We ensure that our conclusions are robust by taking into consideration various proxies for inflation expectations, imported inflation, the domestic output gap and the global output gap.Our results suggest that the global demand conditions are statistically insignificant in the majority of the estimated global versions of HNKPC, independently of the measure of them that is considered. In terms of empirical fit, and especially of the out-of-sample forecasting accuracy, the specifications of the Phillips curve with the domestic and global output gaps among the explanatory variables are not superior to traditional Phillips curves. Interestingly, the relative importance of the global output gap is much smaller in models that are estimated in terms of core inflation, excluding foodstuffs and energy, than in CPI inflation models. This suggests that global demand conditions affect the inflation in Poland indirectly, mainly through the prices of food and energy raw materials.The main conclusion from our study is that external factors that are already considered in the traditional hybrid versions of the new Keynesian Phillips curve are sufficient to account for global influences on prices in the domestic economy. The concept of the global output gap improves neither the explanatory nor the predictive power of HNKPC models.

The Impact of the Crisis and Unconventional Monetary Policy on European Inflation Dynamics

AbstractThis study investigates the impact of the economic crisis in the late 2000s and early 2010s on European inflation dynamics using a hybrid New-Keynesian Phillips Curve (NKPC) during three distinct periods. The pre-crisis period from 1999 through mid-2007, the crisis period until August 2012, and finally the “Whatever-It-Takes”-period after the remark by ECB president Mario Draghi. The structural hybrid NKPC is estimated for six countries of the Euro area (Germany, France, Italy, Spain, The Netherlands and Austria) and for each of the three periods. The crisis and the subsequent reaction of the ECB both seem to have had a profound impact on the dynamics, as estimated parameters differ markedly between the periods. A discussion and interpretation of the results is provided.

The meta-Phillips Curve: Modelling U.S. inflation in the presence of regime change

A novel approach to modelling inflation dynamics is presented based on a set of Hybrid New-Keynesian Phillips Curves, distinguished by the regime duration, and combined into a meta-Phillips Curve using model averaging techniques. The analysis of US data over 1950q1−2016q1 shows that, while the importance of expectations of future inflation varies through time depending on the monetary policy regime and economic environment, future expectations make a more substantial contribution to current inflation than past inflation.

Forecasting Inflation with the Hybrid New Keynesian Phillips Curve: A Compact-Scale Global VAR Approach

ABSTRACTIn this article, the multihorizon predictive power of the Hybrid New Keynesian Phillips Curve (HNKPC) is analysed by making use of several close- and open-economy specifications for the headline inflation of six developed countries. The key element is the use of direct measures of inflation expectations – Consensus Forecast – embedded in a compact-scale Global VAR (GVAR) environment, becoming the baseline open-economy HNKPC (OE-HNKPC) specification. These OE-HNKPC point forecasts are evaluated using the Root Mean Squared Forecast Error (RMSFE) statistic and statistically compared with several benchmarks, including traditional atheoretical models. Several OE-HNKPC as well as a closed-economy HNKPC (CE-HNKPC) specifications are also analysed. The results indicate that in four out of six countries, the CE-HNKPC is the best forecasting model, whereas for the same countries, a parsimonious OE-HNKPC is the second-best alternative, and in most cases, outperforming traditional statistical benchmarks. The RMSFE is obviously affected by the unanticipated effects of the Great Financial Crisis (GFC), spoiling out the performance of a number of competing forecasts. However, when considering an evaluation sample just before the crisis, both the CE-HNKPC and the parsimonious OE-HNKPC still come out as the best forecasting models. Furthermore, these preferred models also do an excellent job tracking inflation better than the best atheoretical models during the GFC.

Evaluation of the New Keynesian Phillips Curve: evidence from the Euro Area and United States

ABSTRACTEmpirical relevance of inflation expectations in the New Keynesian Phillips Curve (NKPC) is highly controversial in the macroeconomics literature. With this in mind, this article evaluates the purely forward-looking NKPC useful for policy analysis with respect to their abilities to account for the dynamic relationship between output and inflation. Our findings show that the NKPC heavily relying on firms’ forward-looking behaviour is hardly supported by the Euro Area and the US data. The failure of the NKPC in matching the data is consistently observed across the sub-samples divided before and after the early 1980s. For comparison, we also investigate the performance of the hybrid NKPC and the traditional backward-looking Phillips curve associated with ad hoc price indexation assumptions.

Об оценке кривой Филлипса для российской экономики

This article focuses on the estimation of the hybrid New-Keynesian Phillips Curve with different kinds of price indices. This helps not only to find to what extent inflation in Russia reacts to the change in the phase of real business cycle, but also to estimate the ratio between agents with rational and adaptive expectations. Such knowledge might be crucial for monetary authorities, because the effectiveness of their policies depends on the understanding of inflation dynamics. Incorrect estimates of the share of rational economic agents can lead to errors in the conducting of monetary policy, which, in turn, may reduce the credibility of central bank amongst population and negatively affect the effectiveness of the future policy conduct.The study uses three different measures of inflation based on the following indexes: the GDP deflator, the CPI, and the GDP deflator, net of export. The main method of estimation is the continuously updating general method of moments (CUE), which has a smaller bias on finite samples and more valid values of the Hansen J-test for the over identification compared to the standard generalized method of moments. Altogether, this makes the inference more valid.The main conclusion is that it is the dynamics of inflation calculated on the basis of the GDP deflator, net of exports, that is best described by the Phillips curve equation, and that the output gap is significant and has a positive sign which is consistent with the theory. Mayhap this is due to the fact that the prices of imported and exported goods are not explicitly included to this measure of inflation, that is, it can be referred to as some internal inflation. Also, an important result is a slightly greater weight of forward looking expectations in the formation of the inflationary process.

Dinâmica recente da inflação brasileira em ambientes distintos de expectativas forward-looking

RESUMO Este estudo analisa como a inflação brasileira recente responde aos ciclos econômicos e ao seu componente inercial considerando ambientes distintos de expectativas forward-looking no arcabouço da Curva de Phillips Novo-Keynesiana Híbrida (CPNKH). Para tal, faz-se uso de informações mensais entre janeiro de 2002 e agosto de 2015 e estimações de GMM-HAC da CPNKH. Os resultados sugerem que a inflação brasileira ainda possui um forte componente inercial e que, em um ambiente de menor previsibilidade dos agentes, a inflação se mostra mais sensível às oscilações cíclicas da atividade econômica. Por fim, observou-se um repasse cambial positivo e significante para a inflação brasileira.

THE ROLE OF INTEREST RATES AND PROVINCIAL MONETARY AGGREGATE IN MAINTAINING INFLATION IN INDONESIA

Inflation is a regional phenomenon hence the use of provincial data might be more appropriateon explaining the relationship between monetary policy and inflation. This paper analyzes the impact of changes in provincial money supply, the policy rate, and the interbank rate on regional inflation, within the framework of Hybrid New Keynesian Phillips Curve (HNKPC). This paper employs Generalized Method of Moments (GMM) on panel data of 32 provinces from 2005-III to 2014-IV. The estimation result shows that provincial monetary aggregate influence inflation significantly only in Sumatera. Furthermore, the policy fate affects the inflation in Sumatera and Kalimantan-Sulawesi. Using the interbank money rate, the result shows this rate also affect the inflation in most of the region except Kalimantan-Sulawesi. These findings show the price-based policy is more significant on affecting the provincial inflation compared to the provincial money supply.

Trend inflation, firms' backward-looking behavior, and inflation gap persistence

In the macroeconomics literature, it is often believed that inflation persistence can be attributed to variations in the Federal Reserve's long-run inflation target rather than to firms' backward-looking pricing behavior. With this in mind, this paper investigates the need for a role of firms' backward-looking behavior in accounting for inflation persistence after trend inflation is eliminated from the inflation rate. Our findings are twofold. First, the observed low contemporaneous correlation and reverse dynamic correlation between the output gap and the inflation gap cannot be replicated by a standard dynamic stochastic general equilibrium (DSGE) model incorporating the purely forward-looking New Keynesian Phillips Curve (NKPC) and trend inflation. When the NKPC is replaced with its hybrid version, the DSGE model does provide a reasonable description of the observed joint dynamic correlation between the output and the inflation gaps. Second, the second moments of key macroeconomic variables are best explained by the hybrid NKPC emphasizing both firms' forward- and their backward-looking behaviors. These results dispute the view that trend inflation is able to replace the role of firms' backward-looking behavior in generating inflation persistence.

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

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.

The new Keynesian Phillips curve: An update on recent empirical advances

This paper presents a comprehensive review of the newly emerging literature on the New Keynesian Phillips Curve (NKPC). The theoretical predictions, econometric estimation techniques as well as the corresponding empirical evidence are discussed focusing on both the closed economy and the open economy versions of the NKPC. A number of important findings are reported about the ability of NKPC to explain the process of inflation dynamics. First, there is weak support for the open economy version of the NKPC to be able to track inflation dynamics if imported inputs are used in the production process. Second, the NKPC describes inflation dynamics across sectors if microeconomic and sectoral level data are used. Further, the survey data employed as a proxy for inflation measure in the newer studies provide enhanced support to the closed economy NKPC with the sign, size and statistical significance of coefficients in line with the theoretical predictions. We provide fresh empirical evidence to check the first finding from the review. The deep structural parameters for four different versions of the NKPC, the pure forward looking NKPC, the Gali and Monacelli's (2005) NKPC, the open economy NKPC and the open economy hybrid NKPC, are estimated for Australia, Canada, New Zealand and the United Kingdom. These estimated coefficients show some support that the specifications of open economy NKPC, which incorporate prices of imported goods as opposed to the terms of trade and real exchange rate, seems to be a better, however, weak indicator of the inflation dynamics. These findings may have important policy implications.

Can the sectoral New Keynesian Phillips curve explain inflation dynamics in the Euro Area?

There is no a priori reason to suppose that price-setting behaviour is homogeneous across sectors and countries. Aggregate data are, however, commonly used to estimate the New Keynesian Phillips curve (NKPC), which may very well yield erroneous results if price-setting behaviour is heterogeneous. In this paper, we therefore estimate the hybrid NKPC for the Euro Area using a novel sectoral data set containing quarterly observations from 1999Q1 to 2012Q1. We show that a positive relationship between inflation and real marginal cost cannot be established empirically for a majority of countries and sectors. We also perform a meta-analysis by combining the results of individual significance tests in order to assess the validity of the NKPC in each country across all sectors and in each sector across all countries. We find no empirical evidence for the NKPC in the Euro Area when this meta-analysis is used. Our results therefore raise doubts about the appropriateness of the NKPC for the analysis of inflation dynamics and monetary policy in the Euro Area.

Overtime Labor, Employment Frictions, and the New Keynesian Phillips Curve

Abstract This paper presents a New Keynesian (NK) model that is extended to differentiate between straight time and overtime work. The model proposes that the New Keynesian Phillips curve (NKPC) should be estimated with marginal cost measured in terms of overtime labor; the resulting coefficient estimates are in accordance with theory and statistically significant for the hybrid NKPC (which allows for backward-looking price setters) but not for the purely forward-looking NKPC. In the hybrid model, backward-looking behavior is found to be predominant. The paper also shows that the incorporation of employment frictions (predetermined employment and convex adjustment costs) in NK models helps reconcile the frequent price changes found in the microdata with the degree of sluggishness in inflation adjustment to output changes at the macro level.