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Testing the Invariance of Expectations Models of Inflation

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  • Nymoen, Ragnar

    ()
    (Dept. of Economics, University of Oslo)

  • L. Castle, Jennifer

    (Magdalen college, Oxford)

  • A. Doornik, Jurgen

    (Nuffield College, Oxford)

  • F. Hendry, David

    (University of Oxford)

Abstract

The new-Keynesian Phillips curve (NKPC) includes expected future inflation to explain current inflation. Such models are estimated by replacing the expected value by the future outcome, using InstrumentalVariables or Generalized Method of Momentsmethods. However, the underlying theory does not allow for various non-stationarities–although crises, breaks and regimes shifts are relatively common. We analytically investigate the consequences for NKPC estimation of breaks in data processes, then apply the new technique of impulse-indicator saturation to salient published studies to check their viability. The coefficient of the future value becomes insignificant after modelling breaks.

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File URL: https://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2010/Memo-21-2010.pdf
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Bibliographic Info

Paper provided by Oslo University, Department of Economics in its series Memorandum with number 21/2010.

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Length: 30 pages
Date of creation: 11 Nov 2010
Date of revision:
Handle: RePEc:hhs:osloec:2010_021

Contact details of provider:
Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
Email:
Web page: http://www.oekonomi.uio.no/indexe.html
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Keywords: New-Keynesian Phillips curve; Inflation expectations; Structural breaks; Impulse-indicator saturation.;

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Cited by:
  1. Hendry, David F., 2011. "On adding over-identifying instrumental variables to simultaneous equations," Economics Letters, Elsevier, vol. 111(1), pages 68-70, April.
  2. Adriana Cornea & Cars Hommes & Domenico Massaro, 2013. "Behavioral Heterogeneity in U.S. Inflation Dynamics," Tinbergen Institute Discussion Papers 13-015/II, Tinbergen Institute.
  3. Mariano Kulish & Adrian Pagan, 2013. "Issues in Estimating New-Keynesian Phillips Curves in the Presence of Unknown Structural Change," RBA Research Discussion Papers rdp2013-11, Reserve Bank of Australia.
  4. Bill Russell & Rosen Azad Chowdhury, 2012. "Estimating United States Phillips Curves With Expectations Consistent With The Statistical Process Of Inflation," Dundee Discussion Papers in Economics 265, Economic Studies, University of Dundee.
  5. J. James Reade & Ulrich Volz, 2011. "From the General to the Specific," Discussion Papers 11-18, Department of Economics, University of Birmingham.
  6. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-88, March.
  7. Nymoen, Ragnar & Swensen, Anders Rygh & Tveter, Eivind, 2012. "Interpreting the evidence for New Keynesian models of inflation dynamics," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 253-263.

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