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Testing the Invariance of Expectations Models of Inflation

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  • David Hendry
  • Jennifer L. Castle
  • Jurgen A. Doornik

Abstract

The new-Keynesian Phillips curve (NKPC) includes expected future inflation as a major feedforward variable to explain current inflation.� Models of this type are regularly estimated by replacing the expected value by the actual future outcome, then using Instrumental Variables or Generalized Method of Moments methods to estimate the parameters.� However, the underlying theory does not allow for various forms of non-stationarity in the data - despite the fact that crises, breaks and regimes shifts are relatively common.� We investigate the consequences for NKPC estimation of breaks in data processes using the new technique of impulse-indicator saturation, and apply the resulting methods to salient published studies to check their viablility.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 510.

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Date of creation: 01 Nov 2010
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Handle: RePEc:oxf:wpaper:510

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Keywords: New-Keynesian Phillips curve; inflation expectations; structural breaks; impulse-indicator saturation;

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Cited by:
  1. Adriana Cornea & Cars Hommes & Domenico Massaro, 2013. "Behavioral Heterogeneity in U.S. Inflation Dynamics," Tinbergen Institute Discussion Papers 13-015/II, Tinbergen Institute.
  2. Russell, Bill & Chowdhury, Rosen Azad, 2012. "Estimating United States Phillips Curves With Expectations Consistent With The Statistical Process Of Inflation," SIRE Discussion Papers 2012-13, Scottish Institute for Research in Economics (SIRE).
  3. 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.
  4. 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.
  5. Mariano Kulish & Adrian Pagan, 2013. "Issues in Estimating New Keynesian Phillips Curves in the Presence of Unknown Structural Change," NCER Working Paper Series 94, National Centre for Econometric Research.
  6. Hendry, David F., 2011. "On adding over-identifying instrumental variables to simultaneous equations," Economics Letters, Elsevier, vol. 111(1), pages 68-70, April.
  7. J. James Reade & Ulrich Volz, 2011. "From the General to the Specific," Discussion Papers 11-18, Department of Economics, University of Birmingham.

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