Pål Boug, Ådne Cappelen and Anders Rygh Swensen () (Statistics Norway)
Abstract
The New Keynesian Phillips Curve (NKPC) has become the benchmark model for understanding inflation in modern monetary economics. One reason for the popularity is the microfoundation of the model, which decomposes agents' behaviour into price adjustments and deviations of the price level from its target. The empirical relevance of the NKPC is, however, a matter of debate as recent studies reveal that some supportive evidence depends crucially on the econometric methods applied. We show how to evaluate the features of the model using cointegration techniques and tests based on both single-behavioural equations and cointegrated VAR models. Our results indicate that the forward-looking part of the NKPC is most likely at odds with Norwegian data. By contrast, we establish a well-specified dynamic model interpreted as a standard backward-looking mark-up price equation. We also demonstrate that the dynamic mark-up model forecasts well post-sample and during a major change in the monetary policy regime, which certainly is strong evidence in favour of this model. Consequently, we conclude that taking account of forward-looking behaviour when modelling consumer price inflation in Norway seems unnecessary to arrive at a well-specified model by econometric criteria.
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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number
460.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Gunnar Bardsen & Eilev S. Jansen & Ragnar Nymoen, 2003.
"Econometric inflation targeting,"
Econometrics Journal,
Royal Economic Society, vol. 6(2), pages 430-461, December.
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Gunnar Bårdsen & Eilev S. Jansen & Ragnar Nymoen, 1999.
"Econometric Inflation Targeting,"
Working Paper Series
0502, Department of Economics, Norwegian University of Science and Technology, revised 30 Oct 2001.
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