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Trend inflation and weak identification in the New Keynesian Phillips curve

Author

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  • Mendes, Igor
  • da Silva Bejarano Aragón, Edilean Kleber
  • Silva, Marcelo E.A.

Abstract

In this paper, we estimate a generalized New Keynesian Phillips curve (GNKPC) using monetary shocks as instruments and an approach robust to weak instruments. Compared to the specification that disregards trend inflation, we find that the backward-looking term becomes statistically insignificant, the forward-looking coefficient is higher, and the slope of the Phillips curve is lower. Furthermore, we find evidence suggesting that the GNKPC is weakly identified. These findings highlight the importance of considering trend inflation in the monetary policy decision-making process.

Suggested Citation

  • Mendes, Igor & da Silva Bejarano Aragón, Edilean Kleber & Silva, Marcelo E.A., 2025. "Trend inflation and weak identification in the New Keynesian Phillips curve," Economics Letters, Elsevier, vol. 255(C).
    • Handle: RePEc:eee:ecolet:v:255:y:2025:i:c:s0165176525003544
    DOI: 10.1016/j.econlet.2025.112517
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    References listed on IDEAS

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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