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Inflation Dynamics And Subjective Expectations In The United States

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  • KLAUS ADAM
  • MARIO PADULA

Abstract

We estimate a forward looking New Keynesian Phillips Curve (NKPC) for the U.S. using data from the Survey of Professional Forecasters as proxy for expected inflation. We find that the NKPC captures inflation dynamics well, independent from whether output or unit labor costs are used as a measure of marginal costs. We show that identification of expectations exploiting orthogonality to output is severely distorted and explains why the NKPC estimated with survey data performs much better than under rational expectations. We also find that lagged inflation enters the price equation significantly suggesting that there is a role for lagged inflation beyond that of capturing non-rationalities in expectations. Estimating the NKPC of Christiano et al. (2001) where lagged inflation enters due to price indexation by non-reoptimizing firms, we find that it captures the role of lagged inflation reasonably well.
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Suggested Citation

  • Klaus Adam & Mario Padula, 2011. "Inflation Dynamics And Subjective Expectations In The United States," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 13-25, January.
  • Handle: RePEc:bla:ecinqu:v:49:y:2011:i:1:p:13-25
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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