New Keynesian Phillips Curve Research Articles

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.

Inflation dynamics analysis in selected MENA countries

The current paper analyses the new Keynesian Phillips curve (NKPC) in the context of selected MENA countries over the 1990-2016 period. This study has used Pooled Mean Group (PMG) and Fully Modified Ordinary Least Square (FMOLS) estimation methods for the empirical analysis. For the dynamic heterogeneous panels, PMG developed by Pesaran et al. (1999) is the most suitable technique. The outcomes by FMOLS asserted that inflation and unemployment are unrelated in the long run, corroborating the long run Philips Curve theory. While, the empirical outcomes obtained by PMG indicate negative linkage between unemployment and inflation in the long run. Nevertheless, the notion of the tradeoff between the inflation and unemployment that expressed by a short-run Phillips curve is not observed in the selected MENA countries. The findings of this study corroborate the hybrid version of NKPC. Moreover, it establishes of the study suggest that the dynamic inflation can be used as a HNKPC model for understanding the inflation behavior in selected MENA countries.

Positive trend inflation and the Phillips curve – A tale of two slopes and various impulse responses

Standard small-scale New Keynesian models (NKM) come with considerable output losses from moderate positive steady-state inflation when the long-run output-inflation relationship is derived from the microeconomic equations. We analyse 1. which trend-inflation-dependent parameter change might move the New Keynesian model’s long-run Phillips curve (LRPC) towards superneutrality and hence bring about a more moderate output impact of steady-state inflation and 2. whether this same parameter change also turns the linearised short-run New Keynesian Phillips curve (NKPC) into the empirically found direction across different trend inflation rates.The parameter change across trend inflation rates should be at least tentatively empirically justified. Two parameters meet our criteria: the usual suspect, the Calvo-parameter, and the intertemporal elasticity of substitution. Last but not least, allowing these parameters to change across trend inflation rates produces impulse responses more in line with “stylised facts” than those of a constant parameter trend inflation model. We consider the impact of each trend-inflation-dependent parameter separately but also a combination of the two.

Uncertainty-dependent effects of monetary policy shocks: A new-Keynesian interpretation

We estimate a nonlinear VAR model to study the real effects of monetary policy shocks in regimes characterized by high vs. low macroeconomic uncertainty. We find unexpected monetary policy moves to exert a substantially milder impact in presence of high uncertainty. We then exploit the set of impulse responses coming from the nonlinear VAR framework to estimate a medium-scale new-Keynesian DSGE model with a minimum-distance approach. The DSGE model is shown to be able to replicate the VAR evidence in both regimes thanks to different estimates of some crucial structural parameters. In particular, we identify a steeper new-Keynesian Phillips curve as the key factor behind the DSGE model’s ability to replicate the milder macroeconomic responses to a monetary policy shock estimated with our VAR in presence of high uncertainty. A version of the model featuring firm-specific capital is shown to be associated to estimates of the price frequency which are in line with some recent evidence based on micro data.This article is part of a Special Issue entitled “Fiscal and Monetary Policies”.

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.

Domestic and Global Output Gaps as Inflation Drivers: What Does the Phillips Curve Tell?

We study how domestic and global output gaps affect CPI inflation. We use a New-Keynesian Phillips curve framework which controls for nonlinear exchange rate movements for a panel of 26 advanced and 22 emerging economies covering the 1994Q1-2017Q4 period. We find broadly that both global and domestic output gaps are significant drivers of inflation both in the pre-crisis (1994-2008) and post-crisis (2008-2017) periods. Furthermore, after the crisis, in advanced economies the effect of the domestic output gap declines, while in emerging economies the effect of the global output gap declines. The paper demonstrates the usefulness of the New Keynesian Phillips curve in identifying the impact of global and domestic output gaps on inflation.

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.

Imperfect Credibility Versus No Credibility of Optimal Monetary Policy

A minimal central bank credibility, with a non-zero probability of not renegning his commitment (quasi-commitment), is a necessary condition for anchoring inflation expectations and stabilizing inflation dynamics. By contrast, a complete lack of credibility, with the certainty that the policy maker will renege his commitment (optimal discretion), leads to the local instability of inflation dynamics. In the textbook example of the new-Keynesian Phillips curve, the response of the policy instrument to inflation gaps for optimal policy under quasi-commitment has an opposite sign than in optimal discretion, which explains this bifurcation.

Uncertainty-Dependent Effects of Monetary Policy Shocks: A New Keynesian Interpretation

We estimate a nonlinear VAR model to study the real effects of monetary policy shocks in regimes characterized by high vs. low macroeconomic uncertainty. We Â…find unexpected monetary policy moves to exert a substantially milder impact in presence of high uncertainty. We then exploit the set of impulse responses coming from the nonlinear VAR framework to estimate a medium-scale new-Keynesian DSGE model with a minimum-distance approach. The DSGE model is shown to be able to replicate the VAR evidence in both regimes thanks to different estimates of some crucial structural parameters. In particular, we identify a steeper new-Keynesian Phillips curve as the key factor behind the DSGE modelÂ’s ability to replicate the milder macroeconomic responses to a monetary policy shock estimated with our VAR in presence of high uncertainty. A version of the model featuring fiÂ…rm-speciÂ…c capital is shown to be associated to estimates of the price frequency which are in line with some recent evidence based on micro data.

Uncertainty-Dependent Effects of Monetary Policy Shocks: A New Keynesian Interpretation

We estimate a nonlinear VAR model to study the real effects of monetary policy shocks in regimes characterized by high vs. low macroeconomic uncertainty. We find unexpected monetary policy moves to exert a substantially milder impact in presence of high uncertainty. We then exploit the set of impulse responses coming from the nonlinear VAR framework to estimate a medium-scale new-Keynesian DSGE model with a minimum-distance approach. The DSGE model is shown to be able to replicate the VAR evidence in both regimes thanks to different estimates of some crucial structural parameters. In particular, we identify a steeper new-Keynesian Phillips curve as the key factor behind the DSGE model’s ability to replicate the milder macroeconomic responses to a monetary policy shock estimated with our VAR in presence of high uncertainty. A version of the model featuring firm-specific capital is shown to be associated to estimates of the price frequency which are in line with some recent evidence based on micro data.

Identification and Generalized Band Spectrum Estimation of the New Keynesian Phillips Curve

This article proposes a new identification strategy and a new estimation method for the hybrid New Keynesian Phillips curve (NKPC). Unlike the predominant Generalized Method of Moments (GMM) approach, which leads to weak identification of the NKPC with U.S. postwar data, our non-parametric method exploits nonlinear variation in inflation dynamics and provides supporting evidence of point-identification. This article shows that identification of the NKPC is characterized by two conditional moment restrictions. This insight leads to a quantitative method to assess identification in the NKPC. For estimation, the article proposes a closed-form Generalized Band Spectrum Estimator (GBSE) that effectively uses information from the conditional moments, accounts for nonlinear variation, and permits a focus on short-run dynamics. Applying the GBSE to U.S postwar data, we find a significant coefficient of marginal cost and that the forward-looking component and the inflation inertia are both equally quantitatively important in explaining the short-run inflation dynamics, substantially reducing sampling uncertainty relative to existing GMM estimates.

Can We Identify the Fed's Preferences?

Using US data, we estimate optimal policy with a probability below one that the Fed reneges on its commitment (limited credibility) versus discretionary policy where the Fed reneges on its commitment at all periods with a probability equal to one (zero credibility). The transmission mechanism is the new-Keynesian Phillips curve with auto-correlated cost-push shock. It includes the labor cost channel or the working capital channel. Discretion with zero credibility of the Fed is rejected. The working capital channel fits the data before Volcker's mandate. The labor cost channel fits the data since Volcker's mandate.

Determinants of Inflation Differentials in the Euro Area: Is the New Keynesian Phillips Curve Enough?

In the euro area, inflation rates diverged after the creation of the single currency, and started to converge again from mid-2002. It is against this background that the paper studies the determinants of inflation differentials in the euro area. We start by using the New Keynesian Phillips Curve (NKPC) to explain inflation differences for a panel of countries. Exchange rate movements and expected inflation in particular play an important part in bringing about diverging inflation dynamics, while lagged inflation does not. The Incomplete Competition Model (ICM) adds explanatory power to the NKPC in describing inflation dynamics across countries. The latter model does not encompass ICM, and the variables proposed by the ICM are statistically significant: the growth in nominal Unit Labour Cost and the long-run disequilibrium between prices and costs explain inflation differentials.

Assessment of hybrid Phillips Curve specifications

Rudd and Whelan (2006) document evidence that the first-difference of inflation negatively depends on its own lag, and highlight that sticky price models emphasizing the role of firms’ forward-looking pricing behavior cannot be reconciled with the stylized fact. We show that the puzzling negative dependence of the first-difference of inflation on its own lag is consistent with the prediction of the hybrid New Keynesian Phillips Curve (NKPC) with lags of inflation, whereas, as it is argued, it is inconsistent with the prediction of both the purely forward-looking NKPC and its hybrid variant with a lag of inflation. Our theoretical results show that the negative dependence appears only when firms’ forward-looking pricing behavior is relatively more important than backward-looking behavior in determining inflation dynamics.

INFLAÇÃO, DESEMPREGO E CHOQUES CAMBIAIS: ESTIMATIVAS VAR PARA A ECONOMIA BRASILEIRA

Este artigo estima um modelo de vetores autorregressivos (VAR) representando a curva de Phillips novo keynesiana com choques cambiais. A taxa de desemprego da Pesquisa Mensal de Emprego (PME) do IBGE é a proxy para o custo marginal, a inflação é medida pelo Índice Nacional de Preços ao Consumidor Amplo (IPCA) e as expectativas foram obtidas do boletim Focus do Banco Central do Brasil. Os resultados indicam que: a) o pass-through cambial é de cerca de 0,04 p.p. na inflação do mês seguinte ao choque de R$ 0,01 no preço do dólar (mais de 0,4 p.p. na inflação anualizada), mas esse efeito é insignificante; b) um choque médio na taxa de desemprego demora ao redor de 18 meses para desaparecer; c) uma inovação de 0,06 p.p. na expectativa de inflação é carregada para a inflação, que atinge um máximo de 0,05 p.p. no mês seguinte ao choque (0,6 p.p. na inflação anualizada); e d) choques na série de inflação não afetam a taxa de desemprego, isto é, mais inflação não reduz o desemprego.

Does the New Keynesian Phillips curve need countercyclical markups?

This paper examines the behavior of four types of markup measures and its implications for the new Keynesian Phillips curve (NKPC). The four types of measures are a procyclical measure, a weakly procyclical measure, an acyclical measure and a countercyclical measure. Motivated by the fact that the U.S. markup has shifted up dramatically since the early 2000s, the paper also presents both empirical dynamics and a new Keynesian model featuring nonstationary markups. After inspecting empirical dynamics of key macroeconomic variables and the performance of the model, it points out that weakly procyclical or acyclical markups are more consistent with the purely forward-looking NKPC. Moreover, a major shortcoming of standard new Keynesian models is their inability to trace the actual behavior of the markup in response to a demand shock.

Time‐Varying Trend Inflation and the New Keynesian Phillips Curve in Australia

This paper investigates whether the persistence and the time‐varying nature of trend inflation can explain the persistence of inflation in Australia — that is, whether it can explain the apparent need for backward‐looking inflation term(s) in the new Keynesian Phillips curve (NKPC) estimated using Australian data. We derive and estimate an extended open‐economy NKPC equation, accounting explicitly for time‐varying trend inflation. Our preferred, best‐fitting estimates based on the closed‐form specification with two indexation lags indicate a significant degree of indexation to past inflation. Thus, in contrast to the result for the US economy, our estimates suggest that accounting for time variation in trend inflation in the NKPC cannot explain away the inertia in the Australian inflation data. The estimates suggest that lagged inflation and future expectations of inflation enter the NKPC with almost equal weights. Finally, notwithstanding the previous results, we find a marked decline in the role of the backward‐looking inflation terms since the adoption of an inflation‐targeting regime by the Reserve Bank in 1993.

Positive Trend Inflation and the Phillips Curve - A Tale of Two Slopes

A small-scale New Keynesian model comes with considerable output losses from moderate positive steady-state inflation when the long-run output-inflation relationship is derived from the microeconomic equations. We analyse: 1. whether allowing for parameter change with trend inflation might move the New Keynesian model's long-run Phillips curve (LRPC) towards superneutrality and hence bring about a more moderate output impact of steady-state inflation and, 2. whether this same parameter change also turns the linearised short-run New Keynesian Phillips Curve (NKPC) into the empirically found direction across different trend inflation rates. We require the parameter change across trend inflation rates to be at least tentatively empirically justified. Two parameters meet our criteria: the usual suspect, the Calvo-parameter, and the intertemporal elasticity of substitution.

A Scientific Inquiry on the Estimation of the Phillips Curve in the Baltic Region

Many countries in European Union (EU) have suffered from the high unemployment rate due to the Eurozone crisis in the end of the 2000s. However, there is a knowledge gap in this important area of study. Many researchers focused on the Western part of Eurozone or PIGS (Portugal, Italy, Spain and Greece) and there is lack of systematic analysis on the Baltic countries. This paper aims to deal with an important scientific problem in macroeconomics regarding a trade-off relationship between unemployment rates and inflation rates. In other words, the main objective of this paper is to revisit the Phillip curve debate by estimating a new Keynesian Phillips curve (NKPC) in three European Union (EU) member countries in Baltic region, namely Estonia, Latvia and Lithuania for the period of 1995-2013. For the purpose of scientific inquiry, this paper used the generalized method of movements (GMM) approach suggested by Gali and Gertler (1999). The novelty of this study is that it is first in its kind to apply the Gali-Gertler (GG) method to examine scientifically a trade-off relationship between inflation and unemployment in these three EU countries. The empirical analysis revealed some important findings. First and foremost, the empirical findings clearly indicated that inflation dynamics in three EU countries in the Baltic region was largely determined by the forward-looking tendency. This means that numerous firms in the region would have a forward-looking price setting tendency. These firms would pay due attention to the expected level of inflation rate in the future. This is main findings from this empirical analysis. Secondly, the findings also indicated that the inflation dynamics does not seem to be determined by the backward-looking behavior. It means that many firms in the region do not seem to have a backward-looking orientation. Thirdly, the empirical findings also indicated that there is no significant trade-off relationship between inflation rate and marginal cost. In other words, there is no significant negative association between inflation rate and marginal cost. DOI: http://dx.doi.org/10.5755/j01.ee.27.3.6896