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The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?

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Author Info

  • Stephen G. Hall

    ()
    (Leicester University and Bank of Greece, Room Astley Clarke 116, University Road, Leicester, LEI 7RH, UK)

  • George Hondroyiannis

    ()
    (Bank of Greece and Harokopio University, 21 E. Venizelos Ave. 102 50 Athens, Greece)

  • P. A. V. B. Swamy

    ()
    (Retired from Federal Reserve Board, Washington, DC, 6333 Brocketts Crossing, Kingstowne, VA 22315)

  • G. S. Tavlas

    ()
    (Economic Research Department, Bank of Greece, 21 El. Venizelos Ave. 102 50. Athens, Greece; Tel. ++30210 320 2370; Fax: ++30210 320 2432)

Abstract

The New Keynesian Phillips Curve (NKPC) specifies a relationship between inflation and a forcing variable and the current period’s expectation of future inflation. Most empirical estimates of the NKPC, typically based on generalized method of moments (GMM) estimation, have found a significant role for lagged inflation, producing a ‘‘hybrid’’ NKPC. Using U.S. quarterly data, this article examines whether the role of lagged inflation in the NKPC might be due to the spurious outcome of specification biases. Like previous investigators, we employ GMM estimation and, like those investigators, we find a significant effect for lagged inflation. We also use time varying coefficient (TVC) estimation, a procedure that produces consistency under a variety of sources of misspecification. Using two separate measures of expected inflation, we find strong support for the view that, under TVC estimation, the coefficient on expected inflation is near unity and that the role of lagged inflation in the NKPC is spurious.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 76 (2009)
Issue (Month): 2 (October)
Pages: 467-481

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Handle: RePEc:sej:ancoec:v:76:2:y:2009:p:467-481

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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. Alexander Apostolides, 2008. "How Similar to South-Eastern Europe were the Islands of Cyprus and Malta in terms of Agricultural Output and Credit? Evidence during the Interwar Period," Working Papers 80, Bank of Greece.
  3. Orland, Andreas & Roos, Michael W.M., 2013. "The New Keynesian Phillips curve with myopic agents," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2270-2286.
  4. Katarína Danišková & Jarko Fidrmuc, 2011. "Inflation Convergence and the New Keynesian Phillips Curve in the Czech Republic," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 5(2), pages 099-115, August.
  5. Roumen Avramov & Dragana Gnjatovic, 2008. "Stabilization Policies in Bulgaria and Yugoslavia During Communism's Terminal Years : 1980s Economic Visions in Retrospect," Working Papers 81, Bank of Greece.
  6. Wolfgang Pollan, 2013. "Inflation Persistence or the Protracted Effects of Commodity Price Changes?," WIFO Working Papers 451, WIFO.
  7. Gomes, Orlando, 2012. "Thought experimentation and the Phillips curve," Research in Economics, Elsevier, vol. 66(1), pages 45-64.
  8. 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.
  9. Stephen Hall & Amangeldi Kenjegaliev & P.A.V.B. Swamy & George S. Tavlas, 2013. "Measuring Currency Pressures: The Cases of the Japanese Yen, the Chinese Yuan, and the U.K. Pound," Discussion Papers in Economics 13/10, Department of Economics, University of Leicester.
  10. Stephen Hall & George Hondroyiannis & P. Swamy & George Tavlas, 2010. "The Fisher Effect Puzzle: A Case of Non-Linear Relationship?," Open Economies Review, Springer, vol. 21(1), pages 91-103, February.
  11. P. Swamy & Stephen Hall, 2012. "Measurement of causal effects," Economic Change and Restructuring, Springer, vol. 45(1), pages 3-23, February.
  12. Stephen Hall & P.A.V.B. Swamy & George S. Tavlas, 2012. "Milton Friedman, the Demand for Money and the ECB’s Monetary-Policy Strategy," Discussion Papers in Economics 12/05, Department of Economics, University of Leicester.
  13. Zarko Lazarevic, 2008. "Banking Performance in South-Eastern Europe During the Interwar Period," Working Papers 79, Bank of Greece.
  14. Jaromir Baxa & Miroslav Plasil & Borek Vasicek, 2012. "Changes in Inflation Dynamics under Inflation Targeting? Evidence from Central European Countries," Working Papers 2012/04, Czech National Bank, Research Department.

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