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Testing the New Keynesian Phillips Curve through Vector Autoregressive models : Results from the Euro area

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  • Luca Fanelli

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Abstract

In this paper we set out a test of the New Keynesian Phillips Curve (NKPC) based on Vector Autoregressive (VAR) models. The proposed technique does not rely on the Anderson and Moore (1985) method and can be implemented with any existing econometric software. The idea is to use a VAR involving the inflation rate and the forcing variable(s) as the expectation generating system and find the restrictions that nest the NKPC within the VAR. The model can be estimated and tested through maximum likelihood methods. We show that the presence of feedbacks from the inflation rate to the forcing variable(s) can a?ect solution properties of the NKPC; when feedbacks are detected the VAR should be regarded as the final form solution of a more general structural model. Possible non-stationary in the variables can be easily taken into account within our framework. Empirical results point that the standard “hybrid” versions of the NKPC are far from being a good first approximation to the dynamics of inflation in the Euro area.

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Bibliographic Info

Paper provided by Department of Statistics, University of Bologna in its series Quaderni di Dipartimento with number 0.

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Date of creation: 2006
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Handle: RePEc:bot:quadip:4

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Keywords: Inflation dynamics; New Keynesian Phillips Curve; Forwardlooking behavior; VEqCM.;

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