Hybrid New Keynesian Phillips Curve Research Articles

Price-Setting Behavior with Menu Costs Experimental Evidence

We experimentally test the price-setting behavior of firms in the Rotemberg (1982) model in order to explain puzzles in the New Keynesian Phillips curve (NKPC). By constructing categories and a quantitative measure that compare behavior with optimum we find heterogeneous price-setting behavior by degree of information acquired about the future. Subjects rarely use past information, but overweight their own past price. We study the impact of heterogeneous price-setting behavior on estimated theoretically derived and hybrid Phillips curves. We find support for features of both NKPCs in our findings at the micro level. But the hybrid NKPC has a superior fit.

Autoregression-based estimation of the new Keynesian Phillips curve

We propose an estimation method of the new Keynesian Phillips curve (NKPC) based on a univariate noncausal autoregressive model for the inflation rate. By construction, our approach avoids a number of problems related to the GMM estimation of the NKPC. We estimate the hybrid NKPC with quarterly U.S. data (1955:1–2010:3), and both expected future inflation and lagged inflation are found important in determining the inflation rate, with the former clearly dominating. Moreover, inflation persistence turns out to be intrinsic rather than inherited from a persistent driving process.

An application of New Keynesian models to inflation in Croatia

An application of New Keynesian models to inflation in Croatia Background: The inflation dynamics of Croatia is studied in the paper, with the review of applicable marginal cost proxies for the hybrid New Keynesian Phillips Curve (NKPC), and estimation of three specifications of the hybrid NKPC for Croatia. Objectives: The goal of this research is to examine the effect of labor's share of income, the price of energy, and the price of imports and other open economy factors in driving inflation in Croatia from the first quarter of 2000 to the fourth quarter of 2011. Methods/Approach: We use the generalized method of moments (GMM) estimator to empirically estimate three NKPC specifications. The J-stat and Cragg-Donald F-test are used to test for overidentification and for weak instruments, respectively. Results: We find that the marginal cost proxy for the energy-augmented specification is statistically significant and quantitatively the largest, whereas those for the other two are statistically significant, but quantitatively negligible. Conclusions: The results provide an empirical contribution both to the literature on inflation in Croatia and the literature of the NKPC in a small open economy. We can conclude that the price of energy has been the strongest driver of inflation, whereas the open economy factors we tested have had very little influence.

New Keynesian Phillips Curve and inflation dynamics in Australia

The New Keynesian Phillips Curve (NKPC) was developed as a response to the New Classical critique that Keynesian macroeconomics lacked micro-foundations. The NKPC provides theoretical micro-foundations that attempt to explain, inter alia, nominal rigidities and, explicitly price stickiness. This paper investigates the validity of the NKPC for Australia. In contrast to the findings for the USA and Euro area, we find that neither the output gap nor marginal cost appears to be a key driving force variable across different set of instruments and estimators (GMM and 2SLS) over the sample period from 1959 to 2009. The flattening of the NKPC along with significant presence of price stickiness is also found in the data. In particular, the reduced form coefficients and implied estimates from the structural parameters of the model support the view that inflation dynamics are forward looking while the role of lagged inflation is also statistically important only after 1980s. However, we claim that the forward looking baseline NKPC contrary to the hybrid NKPC is stable and better explains inflation dynamics for the Australian economy.

Expectation, excess liquidity and inflation dynamics in China

By introducing the shocks from individual activities into the Hybrid New Keynesian Phillips curve (HNKPC), we investigate the inflation dynamics and the effect of excess liquidity in China. According to the estimation result, some soundly conclusions can be drawn. Firstly, the empirical results indicate that the HNKPC is consistent with the nature of inflation dynamics in China, which posits the inflation dynamics as the combination of backward looking adaptive expectations and forward looking rational expectations. Moreover, defining excess liquidity by M2, the elasticity of inflation defined by CPI to excess liquidity is approximately unit, which reveals that the quasi-money is the main force behind inflation. The nature of inflation expectation and the effect of excess liquidity all provide the evidences that tight monetary policy is effective to curbing inflation in China.

Monetary Policy and Inflation Performance: Evidence from Exchange Rate Regimes in Sri Lanka

This paper examines empirical evidence on monetary policy and inflation performance across exchange rate regimes in Sri Lanka. The criterion used to examine inflation performance is the degree of inflation persistence. Three alternative definitions of inflation persistence are used to model inflation dynamics. First, autocorrelation properties of inflation process are examined. Estimates of traditional Phillips curve and the hybrid-new Keynesian Phillips curve (H-NKPC) suggest a significant upward shift in inflation persistence following the change in exchange rate system in late 1977. Recursive estimates of coefficient on lagged inflation and Chow parameter stability tests confirm these results. Second, inflation response to systematic monetary policy actions is examined. Results suggest that inflation is more persistent and monetary policy is more accommodative in the flexible exchange rate regime. However, the correlation between money growth and inflation is found to be modest. Finally, inflation response to non-systemic policy actions (i.e., policy shocks) is examined through impulse response functions of an unrestricted VAR system. Results suggest that policy shocks are more persistent in the flexible exchange rate regime, than in the fixed exchange rate regime. However, maximum lag length of inflation response to a policy shock is not significantly different across regimes, suggesting that results from the impulse response analysis are inconclusive. Overall, there is substantial evidence to suggest that the shift in inflation persistence coincides with the change in exchange rate regimes. Moreover, during the flexible regime, higher monetary accommodation has resulted in higher inflation persistence. Because of sluggish response of inflation to changes in monetary policy measures, more stringent monetary policy measures may be needed to curb inflationary pressures.(JEL E 31, E 52) Key Words: Inflation Persistence, Monetary Policy, Exchange Rate Regimes DOI: 10.4038/ss.v37i1.1227 Staff Studies Volume 37 Numbers 1& 2 2007 p.69-117

Estimating the Hungarian New-Keynesian phillips curve

This paper estimates the hybrid New-Keynesian Phillips curve (NKPC) for Hungary with different techniques. Because of weak instruments, single-equation GMM estimations yield very unreliable results. More robust methods show that basically no statistical inference is possible as to the true specification of the inflation dynamics. However, a more efficient simultaneous-equations method, the full information maximum likelihood (FIML) estimator provides identified parameters. Furthermore, coefficient estimates on the driving variable are positive and significant for the first time, lending much-needed empirical support in favour of the New-Keynesian model. Inflation appears to be determined to an equal extent by past inflation and forward-looking expectations. Structural analysis yields realistic estimates for the frequency of price adjustments and suggests that the dominant price setting behaviour is backward-looking.

Is the Backward-Looking Component Important in a New Keynesian Phillips Curve?

New Keynesian Phillips curves (NKPC) have recently been modified to include additionallagsofinflationinthespecificationinordertocapturetheconsiderablepersistenceinpostwarU.S.inflation. Furthermore, many researchers have agreed on the existence of structural changes in thepersistence of inflation. Continuing with these literatures, we investigate the nature of structuralchanges in the hybrid NKPC and reconsider the role of the backward-looking component in theNKPC, taking into account the possibility of structural changes in the steady-state inflation rate.Our empirical results show multiple structural breaks in the NKPC in 1974 and 1982. Accountingfor these structural changes, the backward-looking component is no longer significant throughoutthe whole sample period. In other words, the significant role of the backward-looking componentin the earlier literature might be spuriously capturing the structural changes in the steady-stateinflation rate. Thus, U.S. inflation dynamics are well explained by a pure NKPC if we take intoaccount the possibility of structural changes in the steady-state inflation rate.

The Phillips Curve Under State-dependent Pricing

This paper is related to a large recent literature studying the Phillips curve in sticky-price equilibrium models. It differs in allowing for the degree of price stickiness to be determined endogenously. A closed-form solution for short-term inflation is derived from the dynamic stochastic general equilibrium (DSGE) model with state-dependent pricing originally developed by Dotsey, King and Wolman. This generalised Phillips curve encompasses the New Keynesian Phillips curve (NKPC) based on Calvo-type price-setting as a special case. It describes current inflation as a function of lagged inflation, expected future inflation, and current and expected future real marginal costs. The paper demonstrates that inflation dynamics generated by the model for a broad class of time and state-dependent price-setting behaviours are well approximated by the popular hybrid NKPC (with one lag of inflation) in a low-inflation environment. This provides an explanation of why the hybrid NKPC performs well in describing inflation dynamics across industrial countries. It implies, however, that the reduced-form coefficients of the hybrid NKPC may not have a structural interpretation.

The Phillips curve under state-dependent pricing

We derive a Phillips curve equation from the dynamic stochastic general equilibrium (DSGE) model with state-dependent pricing developed by Dotsey et al. [1999. State-dependent pricing and the general equilibrium dynamics of money and output. Quarterly Journal of Economics 114, 655-690]. This state-dependent Phillips curve encompasses the new Keynesian Phillips curve (NKPC) based on Calvo-type price setting as a special case. We analyze the effect of the state-dependent terms (that is, the variations in the distributions of price vintages) on inflation persistence, and we examine whether the hybrid NKPC (that is, the NKPC extended by a lagged inflation term) can adequately describe inflation dynamics generated in a calibrated state-dependent pricing economy.

State-Dependency and Firm-Level Optimization: A Contribution to Calvo Price Staggering

We implement a tractable state-dependent Calvo price-setting signal dependent on inflation and aggregate competitiveness. This allows us to derive a New Keynesian Phillips Curve (NKPC) expressed in terms of the actual levels of variables-rather than in-deviation from steady state form - and thus a specification which is not regime-dependent. A consequence of our approach is that ex-ante all firms face the same optimization problem. This state-dependent NKPC nests the conventional hybrid NKPC form as a special case. Finally, we demonstrate the usefulness of our approach by, first, analyzing the persistence and variability of inflation shocks under different inflation regimes and then comparing our state-dependent and time-dependent NKPCs on US data.

INFLATION IN CHINA: MODELLING A ROLLER COASTER RIDE

Abstract. The New Keynesian Phillips curve (NKPC) posits the dynamics of inflation as forward looking and related to marginal costs. In this paper we examine the empirical relevance of the NKPC for China. The empirical results indicate that an augmented (hybrid) NKPC gives results that are consistent with the data generating process. It is in this respect that the NKPC provides useful insights into the nature of inflation dynamics in China as well as useful insights for the conduct of monetary policy.

Inflation dynamics and the New Keynesian Phillips Curve: An identification robust econometric analysis

We use identification-robust methods to assess a New Keynesian Phillips Curve (NKPC) equation. We focus on the Gali – Gertler [1999. Inflation dynamics: a structural econometric analysis. Journal of Monetary Economics 44, 195–222] specification, for U.S. and Canadian data. Two variants of the model are studied: one based on a rational-expectations assumption, and a modification which uses survey-based data on inflation expectations. The two specifications exhibit sharp differences concerning: (i) identification difficulties, (ii) backward-looking behavior, and (iii) price adjustment frequency. Overall, the results provide some support to the hybrid NKPC for the U.S., whereas the model is not suited to Canada. Our analysis underscores the need for employing identification-robust inference methods.

The New Keynesian Phillips Curve in the United States and the Euro Area: Aggregation Bias, Stability and Robustness

In the recent past, the empirical literature on the New Keynesian Phillips Curve (NKPC) has grown rapidly. The NKPC has been shown to describe satisfactorily the relationship between inflation and marginal cost both for the United States and the euro area. However, little attention has been given so far to the stability and robustness of the parameters in the estimated NKPC. In this paper, we aim to help fill this gap. After estimating hybrid NKPCs on US and euro-area data using the generalised method of moments and having found that our results are broadly in line with previous findings, we subject our estimated NKPCs to a thorough stability analysis. We find that the estimated coefficients for the United States are stable, whereas those for the euro area are considerably less stable. We then investigate the possible reasons for this instability. One explanation, explored using the Andrews' test, is the presence of structural breaks. Another possibility is the presence of an aggregation bias, which we investigate by estimating NKPCs for the three largest euro-area economies: Germany, France and Italy. At this disaggregated level, the fit of the NKPC improves, but the coefficients are still unstable. Furthermore, the disaggregated analysis indicates the presence of structural breaks in the three largest euro-area economies.

Inflation Dynamics of Turkey: A Structural Estimation

Recent empirical research on the New Keynesian Phillips Curve (NKPC) does not offer any supporting evidence for its benchmark version in which all firms are forward-looking. There is, however, empirical support for a modified, “hybrid”, NPKC, in which only a proportion of the firms that use a forward-looking rule to set prices.This paper estimates both the benchmark and the hybrid versions of the NKPC using Turkish data. In contrast with the previous applications on developed countries like the U.S. and several Euro area countries, we find empirical support for the benchmark NPKC. This support persists even after controlling for the weak identification problem which has been a serious concern in generalized method of moment estimation. Moreover, the hybrid NKPC is refuted by the data, i.e. the backward-looking behavior is found to be statistically insignificant.

Inflation in Mainland China - Modelling a Roller Coaster Ride

The New Keynesian Phillips curve (NKPC) posits the dynamics of inflation as forward looking and related to marginal costs. In this paper we examine the empirical relevance of the NKPC for mainland China. The empirical results indicate that an augmented (hybrid) NKPC gives results that are consistent with the data generating process. It is in this respect that the NKPC provides useful insights into the nature of inflation dynamics in mainland China as well as useful insights for the conduct of monetary policy.