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Estimating New-Keynesian Phillips Curves: A Full Information Maximum Likelihood Approach

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Author Info
Lindé, Jesper () (Research Department, Central Bank of Sweden)

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Abstract

The New-Keynesian Phillips curve has recently become an important ingredient in monetary policy models. However, using limited information methods, the empirical support for the New-Keynesian Phillips curve appear to be mixed. This paper argues, by means of Monte Carlo simulations with a simple New-Keynesian sticky price model, that single equations methods, e.g. GMM, are likely to produce imprecise and biased estimates. Then, it is argued that estimating the model with full information maximum likelihood (FIML) is a useful way of obtaining better estimates. Finally, a version of the model used in the Monte Carlo simulations is estimated on U.S. data with FIML and although the pure forward-looking New-Keynesian Phillips curve is rejected, a version with both forward- and backward-looking components provides a reasonable approximation of U.S. inflation dynamics.

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Publisher Info
Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 129.

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Length: 30 pages
Date of creation: 01 Dec 2001
Date of revision: 30 Apr 2001
Publication status: Published in Journal of Monetary Economics, 2005, pages 1135-1149.
Handle: RePEc:hhs:rbnkwp:0129

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Related research
Keywords: Monetary policy rule New-Keynesian Phillips curve Rational expectations IS-curve Backward-looking Phillips curve Measurement errors Full Information Maximum Likelihood estimation

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
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  5. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June. [Downloadable!] (restricted)
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  25. Bennett T. McCallum & Edward Nelson, 2000. "Nominal Income Targeting in an Open-Economy Optimizing Model," NBER Working Papers 6675, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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