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The New Keynesian Phillips curve in Europe: does it fit or does it fail?

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  • Peter Tillmann

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Abstract

The canonical New Keynesian model specifies inflation as the present-value of future real marginal cost. This paper tests this New Keynesian Phillips Curve and exploits projections of future real marginal cost generated by VAR models to assess the model's ability to match the behavior of actual inflation. In accordance to the literature, the model fits Euro data well at first sight. However, analyses of this kind disregard the considerable degree of uncertainty surrounding VAR forecasts. A set of bias-corrected bootstrapped confidence bands reveals that this result is consistent with both a well fitting and a completely failing model. Allowing for inflation inertia through backward-looking indexation narrows confidence bands around measures of the model's fit but, still, cannot generate sufficiently precise estimates. Hence, we cannot say whether the model fits or fails. --

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 37 (2009)
Issue (Month): 3 (December)
Pages: 463-473

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Handle: RePEc:spr:empeco:v:37:y:2009:i:3:p:463-473

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Keywords: New Keynesian Phillips curve; Present-value model; Marginal costs; Bootstrap; E31; E32;

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Citations

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Cited by:
  1. Engelbert Stockhammer & Dimitris P. Sotiropoulos, 2012. "The costs of rebalancing the Euro area," Working Papers PKWP1206, Post Keynesian Economics Study Group (PKSG).
  2. Juselius, Mikael, 2008. "Testing the New Keynesian Model on U.S. and Euro Area Data," Economics Discussion Papers 2008-23, Kiel Institute for the World Economy.
  3. Maritta Paloviita & Matti Virén, 2005. "The role of expectations in the inflation process in the euro area," Macroeconomics 0508031, EconWPA.
  4. Fabio Rumler & Maria Teresa Valderrama, 2008. "Comparing the New Keynesian Phillips Curve with Time Series Models to Forecast Inflation," Working Papers 148, Oesterreichische Nationalbank (Austrian Central Bank).
  5. Ahsan Ul Haq Satti & Wasim Shahid Malik & Ghulam Saghir, 2007. "New Keynesian Phillips Curve for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(4), pages 395-404.
  6. Frode Brevik & Manfred Gärtner, 2005. "Partisan Theory and the New Keynesian and Sticky-Information Phillips Curves," University of St. Gallen Department of Economics working paper series 2005 2005-25, Department of Economics, University of St. Gallen.
  7. Tiwari, Aviral Kumar & Oros, Cornel & Albulescu, Claudiu Tiberiu, 2014. "Revisiting the inflation–output gap relationship for France using a wavelet transform approach," Economic Modelling, Elsevier, vol. 37(C), pages 464-475.
  8. Gene Ambrocio & Tae-Seok Jang, 2009. "Productivity Shocks and the New Keynesian Phillips Curve: Evidence from US and Euro Area," Kiel Advanced Studies Working Papers 453, Kiel Institute for the World Economy.
  9. Matti Viren, 2009. "Does the Value-Added Tax Shift to Consumption Prices?," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 3(2), pages 123-142, July.
  10. Aleksejs Melihovs & Anna Zasova, 2007. "Estimation of the Phillips Curve for Latvia," Working Papers 2007/03, Latvijas Banka.

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