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Traditional versus New Keynesian Phillips Curves: Evidence from Output Effects

  • Werner Roeger

    (European Commission)

  • Bernhard Herz

    (University of Bayreuth)

We identify a crucial difference between the backwardlooking and forward-looking Phillips curve concerning the real output effects of monetary policy shocks. The backwardlooking Phillips curve predicts a strict intertemporal trade-off in the case of monetary shocks: a positive short-run response of output is followed by a period in which output is below baseline and the cumulative output effect is exactly zero. In contrast, the forward-looking model implies a positive cumulative output effect. The empirical evidence on the cumulated output effects of money is consistent with the forward-looking model. We also use this method to determine the degree of forward-looking price setting. JEL Codes

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 8 (2012)
Issue (Month): 1 (June)
Pages: 87-109

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Handle: RePEc:ijc:ijcjou:y:2012:q:2:a:3
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  1. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June.
  2. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  3. Peter McAdam & Alpo Willman, 2004. "Supply, Factor Shares and Inflation Persistence: Re-examining Euro-area New-Keynesian Phillips Curves," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(s1), pages 637-670, 09.
  4. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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