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Inflation Dynamics and the New Keynesian Phillips Curve: an Identification Robust Econometric Analysis

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  • Jean-Marie Dufour

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  • Lynda Khalaf
  • Maral Kichian

Abstract

In this paper, we use identification-robust methods to assess the empirical adequacy of a New Keynesian Phillips Curve (NKPC) equation. We focus on the Gali and Gertler’s (1999) specification, on both U.S. and Canadian data. Two variants of the model are studied: one based on a rationalexpectations assumption, and a modification to the latter which consists in using survey data on inflation expectations. The results based on these two specifications exhibit sharp differences concerning: (i) identification difficulties, (ii) backward-looking behavior, and (ii) the frequency of price adjustments. Overall, we find that there is some support for the hybrid NKPC for the U.S., whereas the model is not suited to Canada. Our findings underscore the need for employing identificationrobust inference methods in the estimation of expectations-based dynamic macroeconomic relations. Dans cet article, nous employons des méthodes robustes aux problèmes d’identification afin d’évaluer la valeur empirique d’une nouvelle équation de courbe de Phillips keynésienne (NKPC). Nous concentrons notre analyse sur la spécification de Gali et Gertler (1999), en considérant des données américaines et canadiennes. Nous étudions deux variantes du modèle : une première fondée sur une hypothèse d’attentes rationnelles et une seconde où les attentes sont mesurées à partir de données d’enquête. Les résultats basés sur ces deux spécifications diffèrent de manière notable sur plusieurs points : (i) les problèmes liés à l’identification, (ii) les comportements rétrospectifs, (iii) la fréquence des ajustements. En fin de compte, nos résultats sont compatibles dans une faible mesure avec un modèle NKPC hybride, tandis que le modèle ne semble pas compatible avec les données canadiennes. Nos résultats soulignent l’importance d’utiliser des méthodes robustes à l’identification dans l’analyse empirique de relations macroéconomiques où interviennent des attentes.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2005s-30.

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Date of creation: 01 Aug 2005
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Handle: RePEc:cir:cirwor:2005s-30

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Keywords: identification robust inference; inflation dynamics; macroeconomics; New Keynesian Phillips Curve; optimal instruments; weak instruments; dynamique de l’inflation; inférence robuste à l’identification; instruments faibles; instruments optimaux; macroéconomie; nouvelle courbe de Phillips keynésienne;

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