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

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Author Info

  • Kim Chang-Jin

    ()
    (Korea University and University of Washington)

  • Kim Yunmi

    ()
    (University of Manitoba)

Abstract

New Keynesian Phillips curves (NKPC) have recently been modified to include additional lags of inflation in the specification in order to capture the considerable persistence in postwar U.S. inflation. Furthermore, many researchers have agreed on the existence of structural changes in the persistence of inflation. Continuing with these literatures, we investigate the nature of structural changes in the hybrid NKPC and reconsider the role of the backward-looking component in the NKPC, 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. Accounting for these structural changes, the backward-looking component is no longer significant throughout the whole sample period. In other words, the significant role of the backward-looking component in the earlier literature might be spuriously capturing the structural changes in the steady-state inflation rate. Thus, U.S. inflation dynamics are well explained by a pure NKPC if we take into account the possibility of structural changes in the steady-state inflation rate.

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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 12 (2008)
Issue (Month): 3 (September)
Pages: 1-20

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Handle: RePEc:bpj:sndecm:v:12:y:2008:i:3:n:5

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Cited by:
  1. Borek Vasicek, 2009. "Inflation dynamics and the New Keynesian Phillips curve in EU-4," William Davidson Institute Working Papers Series wp971, William Davidson Institute at the University of Michigan.
  2. Dong Jin Lee & Jai Hyung Yoon, 2012. "The New Keynesian Phillips Curves in Multiple Quantiles and the Asymmetry of Monetary Policy," Working papers 2012-03, University of Connecticut, Department of Economics.
  3. Zhang, Chengsi, 2011. "Inflation persistence, inflation expectations, and monetary policy in China," Economic Modelling, Elsevier, vol. 28(1-2), pages 622-629, January.
  4. Chortareas, Georgios & Magonis, George & Panagiotidis, Theodore, 2012. "The asymmetry of the New Keynesian Phillips Curve in the euro-area," Economics Letters, Elsevier, vol. 114(2), pages 161-163.
  5. Gomes, Orlando, 2012. "Thought experimentation and the Phillips curve," Research in Economics, Elsevier, vol. 66(1), pages 45-64.

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