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Comparing alternative Phillips curve specifications: European results with survey-based expectations

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  • Maritta Paloviita

Abstract

This article examines inflation dynamics in Europe. Econometric specification tests with pooled European data are used to compare the empirical performance of the New Classical, New Keynesian and Hybrid specifications of the Phillips curve. Instead of imposing any specific form of expectations formation, direct measures, i.e. Consensus Economics survey data are used to proxy economic agents' inflation expectations. According to the results, the New Classical Phillips curve has satisfactory statistical properties. Moreover, the purely forward-looking New Keynesian Phillips curve is clearly outperformed by the New Classical and Hybrid Phillips curves. We interpret our results as indicating that the European inflation process is not purely forward looking and inflation cannot instantaneously adjust to changes in expectations. Consequently, even allowing for possible nonrationality in expectations results in a lagged inflation term entering the New Keynesian Phillips curve for inflation dynamics in Europe.

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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 40 (2008)
Issue (Month): 17 ()
Pages: 2259-2270

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Handle: RePEc:taf:applec:v:40:y:2008:i:17:p:2259-2270

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Cited by:
  1. Croonenbroeck, Carsten & Stadtmann, Georg, 2012. "Evaluating Phillips curve based inflation forecasts in Europe: A note," Discussion Papers 329, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
  2. Jerome Creel & Paul Hubert & Francesco Saraceno, 2012. "An assessment of Stability and Growth Pact Reform Proposals in a Small-Scale Macro Framework," Documents de Travail de l'OFCE 2012-04, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Robert Kelm, 2010. "The Exchange Rate and Two Price Inflations in Poland in the Period 1999-2009. Do Globalization and Balassa-Samuelson Effect Matter?," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 2(4), pages 315-349, September.
  4. Lena Vogel, 2008. "The Relationship between the Hybrid New Keynesian Phillips Curve and the NAIRU over Time," Macroeconomics and Finance Series 200803, Hamburg University, Department Wirtschaft und Politik.
  5. Gary Koop & Luca Onorante, 2011. "Estimating Phillips Curves in Turbulent Times using the ECBs Survey of Professional Forecasters," Working Papers 1109, University of Strathclyde Business School, Department of Economics.
  6. Maritta Paloviita, 2009. "On the Generality of the New Keynesian Phillips Curves," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(55), pages 7-32, July - Se.
  7. Marco Buchmann, 2009. "Nonparametric Hybrid Phillips Curves Based on Subjective Expectations: Estimates for the Euro Area," Working Paper Series 1119, European Central Bank.

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