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The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?

Author

Listed:
  • Stephen G. Hall

    () (Leicester University and Bank of Greece, Room Astley Clarke 116, University Road, Leicester, LEI 7RH, UK)

  • George Hondroyiannis

    () (Bank of Greece and Harokopio University, 21 E. Venizelos Ave. 102 50 Athens, Greece)

  • P. A. V. B. Swamy

    () (Retired from Federal Reserve Board, Washington, DC, 6333 Brocketts Crossing, Kingstowne, VA 22315)

  • G. S. Tavlas

    () (Economic Research Department, Bank of Greece, 21 El. Venizelos Ave. 102 50. Athens, Greece; Tel. ++30210 320 2370; Fax: ++30210 320 2432)

Abstract

The New Keynesian Phillips Curve (NKPC) specifies a relationship between inflation and a forcing variable and the current period’s expectation of future inflation. Most empirical estimates of the NKPC, typically based on generalized method of moments (GMM) estimation, have found a significant role for lagged inflation, producing a ‘‘hybrid’’ NKPC. Using U.S. quarterly data, this article examines whether the role of lagged inflation in the NKPC might be due to the spurious outcome of specification biases. Like previous investigators, we employ GMM estimation and, like those investigators, we find a significant effect for lagged inflation. We also use time varying coefficient (TVC) estimation, a procedure that produces consistency under a variety of sources of misspecification. Using two separate measures of expected inflation, we find strong support for the view that, under TVC estimation, the coefficient on expected inflation is near unity and that the role of lagged inflation in the NKPC is spurious.

Suggested Citation

  • Stephen G. Hall & George Hondroyiannis & P. A. V. B. Swamy & G. S. Tavlas, 2009. "The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?," Southern Economic Journal, Southern Economic Association, vol. 76(2), pages 467-481, October.
  • Handle: RePEc:sej:ancoec:v:76:2:y:2009:p:467-481
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    File URL: http://dx.doi.org/10.4284/sej.2009.76.2.467
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    References listed on IDEAS

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    Cited by:

    1. Katarína Danišková & Jarko Fidrmuc, 2011. "Inflation Convergence and the New Keynesian Phillips Curve in the Czech Republic," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 5(2), pages 099-115, August.
    2. Kavtaradze, Lasha, 2014. "Inflation Dynamics in Georgia," MPRA Paper 59966, University Library of Munich, Germany.
    3. Stephen G. Hall & P. A. V. B. Swamy & George S. Tavlas, 2012. "Milton Friedman, the demand for money, and the ECB’s monetary policy strategy," Review, Federal Reserve Bank of St. Louis, pages 153-186.
    4. Borek Vašícek, 2011. "Inflation Dynamics and the New Keynesian Phillips Curve in Four Central European Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(5), pages 71-100, September.
    5. Baxa, Jaromír & Plašil, Miroslav & Vašíček, Bořek, 2015. "Changes in inflation dynamics under inflation targeting? Evidence from Central European countries," Economic Modelling, Elsevier, vol. 44(C), pages 116-130.
    6. Apostolides, Alexander, 2008. "“How Similar to South-Eastern Europe were the Islands of Cyprus and Malta in terms of Agricultural Output and Credit? Evidence during the Interwar Period”," MPRA Paper 9968, University Library of Munich, Germany.
    7. Borek Vašícek, 2011. "Inflation Dynamics and the New Keynesian Phillips Curve in Four Central European Countries," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 47(5), pages 71-100, September.
    8. Phiri, Andrew, 2015. "Examining asymmetric effects in the South African Philips curve: Evidence from logistic smooth transition regression (LSTR) models," MPRA Paper 64487, University Library of Munich, Germany.
    9. Stephen Hall & George Hondroyiannis & P. Swamy & George Tavlas, 2010. "The Fisher Effect Puzzle: A Case of Non-Linear Relationship?," Open Economies Review, Springer, pages 91-103.
    10. repec:cup:macdyn:v:21:y:2017:i:05:p:1158-1174_00 is not listed on IDEAS
    11. Hall, Stephen G. & Kenjegaliev, Amangeldi & Swamy, P.A.V.B. & Tavlas, George S., 2013. "Measuring currency pressures: The cases of the Japanese yen, the Chinese yuan, and the UK pound," Journal of the Japanese and International Economies, Elsevier, pages 1-20.
    12. Daniela Milučká, 2014. "Inflation dynamics in the Czech Republic: Estimation of the New Keynesian Phillips curve," International Journal of Economic Sciences, University of Economics, Prague, vol. 2014(2), pages 53-70.
    13. Zarko Lazarevic, 2008. "Banking Performance in South-Eastern Europe During the Interwar Period," Working Papers 79, Bank of Greece.
    14. Alexander Apostolides, 2008. "How Similar to South-Eastern Europe were the Islands of Cyprus and Malta in terms of Agricultural Output and Credit? Evidence during the Interwar Period," Working Papers 80, Bank of Greece.
    15. Orland, Andreas & Roos, Michael W.M., 2013. "The New Keynesian Phillips curve with myopic agents," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2270-2286.
    16. Gomes, Orlando, 2012. "Thought experimentation and the Phillips curve," Research in Economics, Elsevier, pages 45-64.
    17. Lee, Dong Jin & Yoon, Jai Hyung, 2016. "The New Keynesian Phillips Curve in multiple quantiles and the asymmetry of monetary policy," Economic Modelling, Elsevier, vol. 55(C), pages 102-114.
    18. Hall, Stephen G. & Swamy, P. A. V. B. & Tavlas, George S., 2017. "Time-Varying Coefficient Models: A Proposal For Selecting The Coefficient Driver Sets," Macroeconomic Dynamics, Cambridge University Press, pages 1158-1174.
    19. P. Swamy & Stephen Hall, 2012. "Measurement of causal effects," Economic Change and Restructuring, Springer, pages 3-23.
    20. Hondroyiannis, George & Swamy, P.A.V.B. & Tavlas, George S., 2009. "The New Keynesian Phillips Curve In A Time-Varying Coefficient Environment: Some European Evidence," Macroeconomic Dynamics, Cambridge University Press, pages 149-166.
    21. Karl Aiginger, 2013. "The "greening" of industrial policy, headwinds and a possible symbiosis," WWWforEurope Policy Paper series 3, WWWforEurope.
    22. repec:rjr:romjef:v::y:2017:i:3:p:54-76 is not listed on IDEAS
    23. Dong Jin Lee & Jai Hyung Yoon, 2012. "The New Keynesian Phillips Curves in Multiple Quantiles and the Asymmetry of Monetary Policy," Working papers 2012-03, University of Connecticut, Department of Economics.

    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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