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A Response to Cogley and Sbordone's Comment on "Closed-Form Estimates of the New Keynesian Phillips Curve with Time-Varying Trend Inflation"

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  • Gumbau-Brisa, Fabià
  • Lie, Denny
  • Olivei, Giovanni P.

Abstract

In their 2010 comment (which we refer to as CS10), Cogley and Sbordone argue that: (i) our estimates are not entirely closed form, and hence are arbitrary; (ii) we cannot guarantee that our estimates are valid, while their estimates (Cogley and Sbordone 2008, henceforth CS08) always are; and (iii) the estimates in CS08, in terms of goodness of fit, are just as good as other, much different estimates in our paper. We show in this reply that the exact closed-form estimates are virtually the same as the "quasi" closed-form estimates. Our estimates are consistent with the implicit assumptions underlying the first-stage VAR used to form expectations, while the estimates in CS08 are not. As a result, the estimates in CS08 point towards model misspecification. We also rebut the goodness of fit comparisons in CS10, and provide a more credible exercise that illustrates that our estimates outperform CS08's estimates.

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Bibliographic Info

Paper provided by University of Sydney, School of Economics in its series Working Papers with number 2011-06.

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Date of creation: Jun 2011
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Handle: RePEc:syd:wpaper:2123/7707

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Postal: Sydney, NSW 2006
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Keywords: closed form; model-consistent expectations; New Keynesian Phillips curve; forward-looking Euler equation; time-varying trend inflation;

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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  2. Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent, 2005. "A, B, C’s (And D’s) For Understanding VARS," PIER Working Paper Archive 05-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Yuriy Gorodnichenko & Olivier Coibion, 2009. "Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation," 2009 Meeting Papers 21, Society for Economic Dynamics.
  4. Rudd, Jeremy & Whelan, Karl, 2005. "Modelling inflation dynamics : a critical review of recent research," Open Access publications from University College Dublin urn:hdl:10197/237, University College Dublin.
  5. Roger E. A. Farmer, 1997. "Money in a real business cycle model," Proceedings, Federal Reserve Bank of Cleveland, issue Nov, pages 568-623.
  6. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
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