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Traditional versus New Keynesian Phillips Curves: Evidence from Output Effects

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  • Werner Roeger

    (European Commission)

  • Bernhard Herz

    (University of Bayreuth)

Abstract

We identify a crucial difference between the backwardlooking and forward-looking Phillips curve concerning the real output effects of monetary policy shocks. The backwardlooking Phillips curve predicts a strict intertemporal trade-off in the case of monetary shocks: a positive short-run response of output is followed by a period in which output is below baseline and the cumulative output effect is exactly zero. In contrast, the forward-looking model implies a positive cumulative output effect. The empirical evidence on the cumulated output effects of money is consistent with the forward-looking model. We also use this method to determine the degree of forward-looking price setting. JEL Codes

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 8 (2012)
Issue (Month): 1 (June)
Pages: 87-109

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Handle: RePEc:ijc:ijcjou:y:2012:q:2:a:3

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