Article: article from journal or magazin.
Testing for the New Keynesian Phillips Curve. Additional international evidence
The "New Keynesian" Phillips Curve (NKPC) states that inflation has a purely forward-looking dynamics. In this paper, we test whether the inflation dynamics in European countries can be described by this model. For this purpose, we estimate hybrid Phillips curves, which include both backward and forward-looking components, for major European countries, the euro area, and the US. Estimation is performed using the GMM technique as well as the ML approach. We examine the sensitivity of the results to the choice of output gap or real unit labor cost (ULC) as the forcing variable, and test the stability of the obtained specifications. Our findings can be summarized as follows. First, the GMM estimation method fails to provide relevant estimates of the hybrid Phillips curve. Second, focusing on ML estimation, we obtain two preferred specifications: The output-gap specification with three lags and leads yields very low, and often insignificant, degree of forward-lookingness. The real-ULC specification with a single lag and lead produces larger and significant forward-looking components. These two models appear to fit the data quite well in most European countries.
Forward-looking Phillips curve, euro area, GMM estimator, ML estimator
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