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The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation

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  • P. Swamy
  • George Tavlas

    ()

Abstract

A theoretical analysis of the new Keynesian Phillips curve (NKPC) is provided, formulating the conditions under which the NKPC coincides with a real-world relation that is not spurious or misspecified. A time-varying-coefficient (TVC) model, involving only observed variables, is shown to exactly represent the underlying “true” NKPC under certain conditions. In contrast, “hybrid” NKPC models, which add lagged-inflation and supply-shock variables, are shown to be spurious and misspecified. We also show how to empirically implement the NKPC under the assumption that expectations are formed rationally.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 31 (2007)
Issue (Month): 2 (May)
Pages: 293-306

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Handle: RePEc:spr:joecth:v:31:y:2007:i:2:p:293-306

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Related research

Keywords: Time-varying-coefficient model; Inflation-unemployment trade-off; “Objective” probability; Spurious correlation; Rational expectation; Coefficient driver; C51; E31; E42; E50;

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