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Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve

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  • Jordi Galí
  • Mark Gertler
  • J. David López-Salido

Abstract

Gal and Gertler (1999) developed a hybrid variation of the New Keynesian Phillips curve that relates inflation to real marginal cost, expected future inflation and lagged inflation. GMM estimates of the model suggest that forward looking behavior is highly important; the coefficient on expected future inflation is large and highly significant. Several authors have argued that our results may be the product of either some form of specification bias or poor estimation methods. Here we show that these claims are incorrect. We show that our results are robust to a variety of estimation procedures, including GMM estimation of the closed form, and nonlinear instrumental variables. Hence the conclusions of GG and others regarding the importance of forward looking behavior appear to be robust.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 44.

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Date of creation: Jun 2001
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Handle: RePEc:bge:wpaper:44

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Keywords: Phillips curve; marginal costs; sticky prices;

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References

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  1. Jordi Gali & Mark Gertler & J. David Lopez-Salido, 2001. "European Inflation Dynamics," NBER Working Papers 8218, National Bureau of Economic Research, Inc.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(1), pages 1-45, February.
  3. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research, National Bank of Belgium 35, National Bank of Belgium.
  4. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series, European Central Bank 0722, European Central Bank.
  5. Argia M. Sbordone, 2005. "Do expected future marginal costs drive inflation dynamics?," Staff Reports, Federal Reserve Bank of New York 204, Federal Reserve Bank of New York.
  6. Jeremy Rudd & Karl Whelan, 2001. "New tests of the New-Keynesian Phillips curve," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-30, Board of Governors of the Federal Reserve System (U.S.).
  7. Timothy Cogley & Argia M. Sbordone, 2005. "A search for a structural Phillips curve," Staff Reports, Federal Reserve Bank of New York 203, Federal Reserve Bank of New York.
  8. N. Gregory Mankiw, 2000. "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," NBER Working Papers 7884, National Bureau of Economic Research, Inc.
  9. Gali, Jordi & Gertler, Mark & David Lopez-Salido, J., 2003. "Erratum to "European inflation dynamics": [European Economic Review 45 (2001), 1237-1270]," European Economic Review, Elsevier, Elsevier, vol. 47(4), pages 759-760, August.
  10. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  11. Smets, Frank & Wouters, Rafael, 2004. "Comparing Shocks and Frictions in US and Euro Area Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4750, C.E.P.R. Discussion Papers.
  12. Argia M. Sbordone, 2001. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Departmental Working Papers, Rutgers University, Department of Economics 199822, Rutgers University, Department of Economics.
  13. André Kurmann, 2004. "Maximum Likelihood Estimation of Dynamic Stochastic Theories with an Application to New Keynesian Pricing," Macroeconomics, EconWPA 0409028, EconWPA.
  14. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(6), pages 1151-1166, September.
  15. Kurmann, Andre, 2005. "Quantifying the uncertainty about the fit of a new Keynesian pricing model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(6), pages 1119-1134, September.
  16. Collard, Fabrice & Dellas, Harris, 2004. "The New Keynesian Model with Imperfect Information and Learning," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 273, Institut d'Économie Industrielle (IDEI), Toulouse.
  17. Linde, Jesper, 2005. "Estimating New-Keynesian Phillips curves: A full information maximum likelihood approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(6), pages 1135-1149, September.
  18. Argia M. Sbordone, 2005. "A Limited Information Approach to the Simultaneous Estimation of Wage and Price Dynamics," Computing in Economics and Finance 2005, Society for Computational Economics 321, Society for Computational Economics.
  19. Ireland, Peter N., 2001. "Sticky-price models of the business cycle: Specification and stability," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(1), pages 3-18, February.
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