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Evaluating the German (New Keynesian) Phillips curve

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  • Scheufele, Rolf

Abstract

This paper evaluates the New Keynesian Phillips curve (NKPC) and its hybrid variant within a limited information framework for Germany. The main interest resides in the average frequency of price re-optimization by firms. We use the labor income share as the driving variable and consider a source of real rigidity by allowing for a fixed firm-specific capital stock. A GMM estimation strategy is employed as well as an identification robust method based on the Anderson-Rubin statistic. We find that the German Phillips curve is purely forward-looking. Moreover, our point estimates are consistent with the view that firms re-optimize prices every 2-3 quarters. These estimates seem plausible from an economic point of view. But the uncertainties around these estimates are very large and also consistent with perfect nominal price rigidity, where firms never re-optimize prices. This analysis also offers some explanation as to why previous results for the German NKPC based on GMM differ considerably. First, standard GMM results are very sensitive to the way in which orthogonality conditions are formulated. Further, model mis-specifications may be left undetected by conventional J tests. This analysis points out the need for identification robust methods to get reliable estimates for the NKPC.

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  • Scheufele, Rolf, 2010. "Evaluating the German (New Keynesian) Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 145-164, August.
    • Handle: RePEc:eee:ecofin:v:21:y:2010:i:2:p:145-164
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    6. Capazario, Michele, 2022. "Developing an Income-Distribution- Sensitive Taylor Rule: An Application to South Africa," MPRA Paper 112740, University Library of Munich, Germany.
    7. Malikane, Christopher, 2014. "A new Keynesian triangle Phillips curve," Economic Modelling, Elsevier, vol. 43(C), pages 247-255.
    8. Giesen, Sebastian & Holtemöller, Oliver & Scharff, Juliane & Scheufele, Rolf, 2010. "A First Look on the New Halle Economic Projection Model," IWH Discussion Papers 6/2010, Halle Institute for Economic Research (IWH).
    9. Christopher Malikane, 2017. "The labour share and the dynamics of output," Applied Economics, Taylor & Francis Journals, vol. 49(37), pages 3741-3750, August.
    10. Sell, Friedrich L. & Reinisch, David C., 2013. "How do Beveridge and Phillips curves in the euro area behave under the stress of the world economic crisis?," Working Papers in Economics 2013,1, Bundeswehr University Munich, Economic Research Group.
    11. Giesen, Sebastian & Holtemöller, Oliver & Scharff, Juliane & Scheufele, Rolf, 2012. "The Halle Economic Projection Model," Economic Modelling, Elsevier, vol. 29(4), pages 1461-1472.

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    More about this item

    Keywords

    Inflation dynamics Phillips curve Weak instruments Optimal instruments;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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