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The empirical validity of the New Keynesian Phillips curve using survey forecasts of inflation

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  • Mazumder, Sandeep

Abstract

This paper investigates the performance of the New Keynesian Phillips curve when survey forecasts of inflation are used to proxy for inflation expectations. Previous authors such as Brissimis and Magginas (2008) have applied survey measures of inflation expectations to the NKPC, and have concluded that these estimates are superior to those estimated using actual data on future inflation. However this approach employs the use of the labor income share as the proxy for real marginal cost, something which is highly problematic once we consider the countercyclicality of this variable. This paper develops and tests a procyclical marginal cost variable alongside various survey measures of inflation forecasts in the NKPC, while recognizing the problem of weak instruments that occurs when estimating the model using conventional GMM. We find that the NKPC produces a counter-intuitive negative and significant coefficient on procyclical marginal cost when surveys of inflation forecasts are used, which casts serious doubt on the empirical viability of the NKPC model, even when estimated with survey inflation forecasts.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 6 ()
Pages: 2439-2450

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:6:p:2439-2450

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Inflation; Phillips curve; Marginal cost;

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Cited by:
  1. Malikane, Christopher, 2013. "A New Keynesian Triangle Phillips Curve," MPRA Paper 43548, University Library of Munich, Germany.
  2. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-88, March.
  3. Sandeep Mazumder & Ryan Pahl, 2013. "What if the UK had Joined the Euro in 1999?," Open Economies Review, Springer, vol. 24(3), pages 447-470, July.
  4. Oinonen, Sami & Paloviita, Maritta & Vilmi , Lauri, 2013. "How have inflation dynamics changed over time? Evidence from the euro area and USA," Research Discussion Papers 6/2013, Bank of Finland.

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