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Evaluating New Keynesian Phillips Curve under VAR-Based Learning

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Author Info
Fanelli, Luca

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Abstract

This paper proposes an econometric evaluation of the New Keynesian Phillips Curve (NKPC) in the euro area, under a particular specification of the adaptive learning hypothesis. The key assumption is that agents' perceived law of motion is a Vector Autoregressive (VAR) model, whose coefficients are updated by maximum likelihood estimation as the information set increases over time. Each time new data is available, likelihood ratio tests for the cross-equation restrictions that the NKPC imposes on the VAR coefficients are computed and compared with a proper set of critical values, which take the sequential nature of the test into account. The analysis focuses on the case in which the variables can be approximated as nonstationary cointegrated processes. Results on quarterly data relative to the period 1981 - 2006 show that: (i) the euro area inflation rate and the wage share are cointegrated, although their relationship does not appear stable during the eighties and first nineties; (ii) the cointegrated version of the ‘hybrid' NKPC is sharply rejected under the rational expectations hypothesis; (iii) the NKPC is rejected also when the model is evaluated under a particular formulation of the adaptive learning hypothesis over the monitoring period 1986 - 2006. --

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Publisher Info
Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 2 (2008)
Issue (Month): 33 ()
Pages: 1-24
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Handle: RePEc:zbw:ifweej:7400

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Related research
Keywords: Adaptive learning; cointegration; cross-equation restrictions; forward-looking model; New Keynesian Phillips Curve; VAR; VEqC;

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Find related papers by JEL classification:
E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ordóñez, Javier & Jusélius, Katarina, 2009. "Balassa-Samuelson and Wage, Price and Unemployment Dynamics in the Spanish Transition to EMU Membership," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(4), pages 1-30. [Downloadable!]
  2. Jusélius, Katarina, 2009. "Special Issue on Using Econometrics for Assessing Economic Models: An Introduction," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(28), pages 1-20. [Downloadable!]
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