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Inflation dynamics and subjective expectations in the United States

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  • Padula, Mario
  • Backé, Peter

Abstract

We estimate a forward-looking New Keynesian Phillips Curve (NKPC) for the U.S. using data from the Survey of Professional Forecasters as proxy for expected inflation. We obtain significant and plausible estimates for the structural parameters of the NKPC (the discount factor and the share of firms adjusting prices) independent from whether output or unit labor costs are used as a measure of marginal costs. Survey expectations suggest that the usual identification of expectations exploiting orthogonality of forecast errors with respect to output is severely distorted, which explains why the NKPC estimated with survey data performs much better than under the assumption of rational expectations. We also find that lagged inflation enters the price equation significantly, even when controlling for its ability to predict expectations. This suggests a role for lagged inflation beyond that of capturing non-rationalities in expectations. When estimating a Phillips curve where lagged inflation enters due to price indexation by non-reoptimizing firms, we find that rejection of the coefficient restrictions depends on the measure of marginal costs used. JEL Classification: E31

Suggested Citation

  • Padula, Mario & Backé, Peter, 2003. "Inflation dynamics and subjective expectations in the United States," Working Paper Series 222, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2003222
    Note: 508510
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp222.pdf
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    inflation; Phillips curve; subjective expectations;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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