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Productivity Shocks and the New Keynesian Phillips Curve: Evidence from US and Euro Area

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Author Info
Gene Ambrocio
Tae-Seok Jang
Abstract

This paper seeks to understand dynamics of inflation and marginal cost (labor share) in models that account for the inclusion of productivity shocks in standard New Keynesian Phillips Curve (NKPC). The question of interest is on the empirical importance of and whether productivity shocks shift the Phillips curve using U.S. and Euro area data. Highlighting the inclusion of productivity growth, we employ a hybrid model specification augmented with a productivity term. The model is estimated using the Generalized Method of Moments (GMM) following Gali and Gertler (1999). Our main finding is that a simple extension of the baseline and hybrid models using more recent data (2006:Q4 for the US and 2005:Q4 for the Euro area) yield less convincing results than the previous literature. Furthermore, our estimation results provide some support for the inclusion of productivity growth particularly for the US. We conclude that a better understanding of the inflation-unemployment tradeoff requires accounting for shifts in the Phillips Curve due to productivity shocks

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Paper provided by Kiel Institute for the World Economy in its series Kiel Advanced Studies Working Papers with number 453.

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Length: 15 pages
Date of creation: Sep 2009
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Handle: RePEc:kie:kieasw:453

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Related research
Keywords: New Keynesian; Phillips Curve; Productivity Growth; GMM;

Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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  1. Tillmann, Peter, 2005. "The New Keynesian Phillips Curve in Europe : does it fit or does it fail?," Discussion Paper Series 1: Economic Studies 2005,04, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. Jeremy Rudd & Karl Whelan, 2006. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," American Economic Review, American Economic Association, vol. 96(1), pages 303-320, March. [Downloadable!]
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  3. Jondeau, Eric & Le Bihan, Herve, 2005. "Testing for the New Keynesian Phillips Curve. Additional international evidence," Economic Modelling, Elsevier, vol. 22(3), pages 521-550, May. [Downloadable!] (restricted)
  4. Rudd, Jeremy & Whelan, Karl, 2005. "New tests of the new-Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1167-1181, September. [Downloadable!] (restricted)
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  5. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270. [Downloadable!] (restricted)
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  6. Marika Karanassou & Hector Sala, 2008. "Productivity Growth and the Phillips Curve: A Reassessment of the US Experience," Discussion Papers 2008-06, School of Economics, The University of New South Wales. [Downloadable!]
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  7. Ichiro Muto, 2009. "Estimating A New Keynesian Phillips Curve With A Corrected Measure Of Real Marginal Cost: Evidence In Japan," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 667-684, October. [Downloadable!] (restricted)
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  8. Marika Karanassou & Hector Sala & Dennis Snower, 2008. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," Kiel Working Papers 1441, Kiel Institute for the World Economy. [Downloadable!]
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  9. Jeremy Rudd & Karl Whelan, 2007. "Modeling Inflation Dynamics: A Critical Review of Recent Research," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 155-170, 02. [Downloadable!] (restricted)
    Other versions:
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