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Estimates of the US Phillips curve with the general to specific method

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  • Rao, B. Bhaskara
  • Paradiso, Antonio

Abstract

This paper distinguishes between the long run and short run Phillips curve (PC) and uses the micro theory based specification, with forward looking expectations, for the long run PC. The long run and the implied short run dynamic equations are estimated in one step with the general to specific method (GETS). Our approach has two distinct advantages. Firstly, classical estimation methods can be used, irrespective of the stationarity properties of the variables. Secondly, instead of arbitrarily adding the lagged inflation rate to the theory based long run PC to capture persistence in inflation, our approach shows that persistence effects can also be captured through the dynamic adjustment equations. This has an added advantage because it offers a more flexible lag structure to estimate dynamic adjustments compared to the partial adjustment process in the hybrid NKPC.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28411.

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Date of creation: 16 Jan 2011
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Handle: RePEc:pra:mprapa:28411

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Keywords: US New Keynesian Phillips Curve; Forward looking expectations; Alternative measures of the Driving Forces; GETS;

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  1. Pablo A. Guerron-Quintana, 2010. "The implications of inflation in an estimated New-Keynesian model," Working Papers 10-2, Federal Reserve Bank of Philadelphia.
  2. Jeremy Rudd & Karl Whelan, 2006. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," American Economic Review, American Economic Association, American Economic Association, vol. 96(1), pages 303-320, March.
  3. Robert Shimer, 2007. "Reassessing the Ins and Outs of Unemployment," NBER Working Papers 13421, National Bureau of Economic Research, Inc.
  4. B. Bhaskara Rao, 2007. "Estimating short and long-run relationships: a guide for the applied economist," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 39(13), pages 1613-1625.
  5. Jeremy Rudd & Karl Whelan, 2005. "Modelling inflation dynamics: a critical review of recent research," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2005-66, Board of Governors of the Federal Reserve System (U.S.).
  6. Rao, B. Bhaskara & Singh, Rup & Kumar, Saten, 2008. "Do we need time series econometrics?," MPRA Paper 6627, University Library of Munich, Germany.
  7. Pearce, Douglas K, 1979. "Comparing Survey and Rational Measures of Expected Inflation: Forecast Performance and Interest Rate Effects," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(4), pages 447-56, November.
  8. Baghestani, Hamid & Noori, Esmail, 1988. "On the rationality of the Michigan monthly survey of inflationary expectations," Economics Letters, Elsevier, Elsevier, vol. 27(4), pages 333-335.
  9. Boug, Pål & Cappelen, Adne & Swensen, Anders Rygh, 2010. "The new Keynesian Phillips curve revisited," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(5), pages 858-874, May.
  10. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 341, Department of Economics and Business, Universitat Pompeu Fabra.
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