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The New Keynesian Phillips curve and the role of expectations: Evidence from the CESifo World Economic Survey

  • Henzel, Steffen
  • Wollmershäuser, Timo

We provide evidence on the fit of the hybrid New Keynesian Phillips curve for selected Euro zone countries, the US and the UK. Instead of imposing rational expectations and estimating the Phillips curve by the Generalized Method of Moments, we use direct measures of inflation expectations from the CESifo World Economic Survey. Our main findings are as follows: (i) The use of survey data gives empirical results, which are more reliable than those obtained from the GMM approach. (ii) The purely forward-looking Phillips curve can be rejected in favor of the hybrid New Keynesian Phillips curve. (iii) The estimated coefficients on past inflation are higher when using survey expectations than when using the rational expectations GMM approach. (iv) It remains unclear whether real unit labor costs or a measure of the output gap should be used as a proxy for real marginal costs. (v) Theory-based restrictions lead to an improvement of the empirical results.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 25 (2008)
Issue (Month): 5 (September)
Pages: 811-832

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Handle: RePEc:eee:ecmode:v:25:y:2008:i:5:p:811-832
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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