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Inflation Dynamics And Subjective Expectations In The United States

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  • KLAUS ADAM
  • MARIO PADULA

Abstract

We estimate a forward-looking New Keynesian Phillips Curve (NKPC) for the U.S. using data from the Survey of Professional Forecasters as proxy for expected inflation. We obtain significant and plausible estimates for the structural parameters of the NKPC (the discount factor and the share of firms adjusting prices) independent from whether output or unit labor costs are used as a measure of marginal costs. Survey expectations suggest that the usual identification of expectations exploiting orthogonality of forecast errors with respect to output is severely distorted, which explains why the NKPC estimated with survey data performs much better than under the assumption of rational expectations. We also find that lagged inflation enters the price equation significantly, even when controlling for its ability to predict expectations. This suggests a role for lagged inflation beyond that of capturing non-rationalities in expectations. When estimating a Phillips curve where lagged inflation enters due to price indexation by non-reoptimizing firms, we find that rejection of the coefficient restrictions depends on the measure of marginal costs used. JEL Classification: E31

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 49 (2011)
Issue (Month): 1 (01)
Pages: 13-25

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Handle: RePEc:bla:ecinqu:v:49:y:2011:i:1:p:13-25

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  1. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  2. Dean Croushore, 1993. "Introducing: the survey of professional forecasters," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-15.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  4. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers 653, Stockholm - International Economic Studies.
  5. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  6. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
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