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Investigating the structural stability of the Phillips curve relationship

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  • Groen, Jan J J

    ()
    (Federal Reserve Bank of New York)

  • Mumtaz, Haroon

    ()
    (Bank of England)

Abstract

The reduced-form correlation between inflation and measures of real activity has changed substantially for the main developed economies over the post-WWII period. In this paper we attempt to describe the observed inflation dynamics in the United Kingdom, the United States and the euro area with a sequence of New Keynesian Phillips Curve (NKPC) equations that are log-linearised around different, non-zero, steady-state inflation levels. In doing this, we follow a two-step estimation strategy. First, we model the time variation in the relationship between inflation and a real cost-based measure of activity through a Markov-switching vector autoregressive model. We then impose the cross-equation restrictions of a Calvo pricing-based NKPC under non-zero steady-state inflation and estimate the structural parameters by minimising for each inflation state the distance between the restricted and unrestricted vector autoregressive parameters. The structural estimation results indicate that for all the economies there is evidence for a structurally invariant NKPC, albeit with a significant backward-looking component.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 350.

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Length: 48 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:boe:boeewp:0350

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Keywords: New Keynesian Phillips Curve; trend inflation; Markov-switching VAR; minimum distance estimation.;

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References

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  1. Blanchard, Olivier J & Galí, Jordi, 2005. "Real Wage Rigidities and the New Keynesian Model," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5375, C.E.P.R. Discussion Papers.
  2. Oleksiy Kryvtsov & Peter J. Klenow, 2004. "State-Dependent or Time-Dependent Pricing: Does It Matter For Recent U.S. Inflation?," Computing in Economics and Finance 2004, Society for Computational Economics 277, Society for Computational Economics.
  3. Sahuc, J-G., 2004. "Partial Indexation, Trend Inflation, and the Hybrid Phillips Curve," Working papers, Banque de France 118, Banque de France.
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Cited by:
  1. Gbaguidi, David Sedo, 2011. "Regime Switching in a New Keynesian Phillips Curve with Non-zero Steady-state Inflation Rate," MPRA Paper 35481, University Library of Munich, Germany.
  2. Jan J.J. Groen & George Kapetanios, 2008. "Revisiting Useful Approaches to Data-Rich Macroeconomic Forecasting," Working Papers, Queen Mary, University of London, School of Economics and Finance 624, Queen Mary, University of London, School of Economics and Finance.
  3. Miles, William & Vijverberg, Chu-Ping, 2011. "Formal targets, central bank independence and inflation dynamics in the UK: A Markov-Switching approach," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(4), pages 644-655.
  4. Gbaguidi S. DAVID, 2011. "Expectations Impact On The Effectiveness Of The Inflation-Real Activity Trade-Off," Theoretical and Practical Research in Economic Fields, ASERS Publishing, ASERS Publishing, vol. 0(2), pages 141-182, December.
  5. Tobias Adrian & Erkko Etula & Jan J. J. Groen, 2010. "Financial amplification of foreign exchange risk premia," Staff Reports, Federal Reserve Bank of New York 461, Federal Reserve Bank of New York.
  6. Barnett, Alina & Mumtaz, Haroon & Theodoridis, Konstantinos, 2014. "Forecasting UK GDP growth and inflation under structural change. A comparison of models with time-varying parameters," International Journal of Forecasting, Elsevier, Elsevier, vol. 30(1), pages 129-143.
  7. Kuttner, Ken & Robinson, Tim, 2010. "Understanding the flattening Phillips curve," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 21(2), pages 110-125, August.

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