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Addressing the endogeneity of slack in Phillips Curves

Author

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  • Dovì, Max-Sebastian
  • Koester, Gerrit
  • Nickel, Christiane

Abstract

Endogeneity of the labour market slack in reduced-form Phillips Curves (PCs) is usually addressed either by including proxies for omitted supply shocks, or by using instrumental variables. Using the Kiviet (2020) Kinky Least Squares estimator, we find evidence that supply-shock proxies should not be omitted from PCs, and that many popular instrumental variables seem to be invalid. We estimate a standard backward-looking wage Phillips Curve by Kinky Least Squares and find that unless a large negative correlation between the slack variable and the error term is assumed, the coefficient of the slack variable is significantly negative. JEL Classification: C1, E3

Suggested Citation

  • Dovì, Max-Sebastian & Koester, Gerrit & Nickel, Christiane, 2021. "Addressing the endogeneity of slack in Phillips Curves," Working Paper Series 2619, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20212619
    Note: 3015628
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    References listed on IDEAS

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    More about this item

    Keywords

    instrument-free inference; limited-information inference; Phillips Curves;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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