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The empirical validity of the New Keynesian Phillips curve using survey forecasts of inflation

  • Mazumder, Sandeep

This paper investigates the performance of the New Keynesian Phillips curve when survey forecasts of inflation are used to proxy for inflation expectations. Previous authors such as Brissimis and Magginas (2008) have applied survey measures of inflation expectations to the NKPC, and have concluded that these estimates are superior to those estimated using actual data on future inflation. However this approach employs the use of the labor income share as the proxy for real marginal cost, something which is highly problematic once we consider the countercyclicality of this variable. This paper develops and tests a procyclical marginal cost variable alongside various survey measures of inflation forecasts in the NKPC, while recognizing the problem of weak instruments that occurs when estimating the model using conventional GMM. We find that the NKPC produces a counter-intuitive negative and significant coefficient on procyclical marginal cost when surveys of inflation forecasts are used, which casts serious doubt on the empirical viability of the NKPC model, even when estimated with survey inflation forecasts.

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File URL: http://www.sciencedirect.com/science/article/pii/S0264999311001581
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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 6 ()
Pages: 2439-2450

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:6:p:2439-2450
DOI: 10.1016/j.econmod.2011.06.026
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Olivier Coibion, 2010. "Testing the Sticky Information Phillips Curve," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 87-101, February.
  3. Sophocles N. Brissimis & Nicholas S. Magginas, 2006. "Inflation Forecasts and the New Keynesian Phillips Curve," Working Papers 38, Bank of Greece.
  4. Sandeep Mazumder, 2008. "The New Keynesian Phillips Curve and the Cyclicality of Marginal Cost," Economics Working Paper Archive 545, The Johns Hopkins University,Department of Economics.
  5. Chengsi Zhang & Denise R. Osborn & Dong Heon Kim, 2008. "Observed Inflation Forecasts and the New Keynesian Phillips Curve," Discussion Paper Series 0801, Institute of Economic Research, Korea University.
  6. Jeremy B. Rudd & Karl Whelan, 2005. "Modelling inflation dynamics: a critical review of recent research," Finance and Economics Discussion Series 2005-66, Board of Governors of the Federal Reserve System (U.S.).
  7. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-29, October.
  8. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  9. Sandeep Mazumder, 2011. "Inflation and marginal cost: on the importance of their covariance," Applied Economics Letters, Taylor & Francis Journals, vol. 18(11), pages 1083-1089.
  10. Gwin, Carl R. & VanHoose, David D., 2008. "Alternative measures of marginal cost and inflation in estimations of new Keynesian inflation dynamics," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 928-940, September.
  11. Henzel, Steffen & Wollmershäuser, Timo, 2008. "The New Keynesian Phillips curve and the role of expectations: Evidence from the CESifo World Economic Survey," Munich Reprints in Economics 19416, University of Munich, Department of Economics.
  12. repec:nbr:nberre:0126 is not listed on IDEAS
  13. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  14. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  15. Jeffrey C. Fuhrer & Giovanni P. Olivei, 2004. "Estimating forward looking Euler equations with GMM estimators: an optimal instruments approach," Working Papers 04-2, Federal Reserve Bank of Boston.
  16. Mark Bils & James A. Kahn, 1999. "What Inventory Behavior Tells Us About Business Cycles," NBER Working Papers 7310, National Bureau of Economic Research, Inc.
  17. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
  18. Barkume, Anthony J., 2007. "Some New Evidence on Overtime Use, Total Job Compensation, and Wage Rates," Working Papers 402, U.S. Bureau of Labor Statistics.
  19. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
  20. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
  21. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
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