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A note on the stability of the New Keynesian Phillips Curve in Europe

Listed author(s):
  • Peter Tillmann

This note investigates how the explanatory power of the forward-looking New Keynesian Phillips Curve evolves over time. We exploit the present-value implications of the model and use VAR forecasts to assess whether the model matches the behaviour of actual inflation in the Euro area. A set of rolling regressions shows that the model's explanatory power varies substantially over the sample. Regime changes in the underlying monetary framework, i.e. realignment crises in the European Monetary System, the Maastricht treaty and, eventually, the introduction of European Monetary Union, are reflected in a deterioration of the model's explanatory power.

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File URL: http://hdl.handle.net/10.1080/13504850701720262
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Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 17 (2010)
Issue (Month): 3 (February)
Pages: 241-245

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Handle: RePEc:taf:apeclt:v:17:y:2010:i:3:p:241-245
DOI: 10.1080/13504850701720262
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  1. Jeremy B. Rudd & Karl Whelan, 2003. "Can rational expectations sticky-price models explain inflation dynamics?," Finance and Economics Discussion Series 2003-46, Board of Governors of the Federal Reserve System (U.S.).
  2. Glenn D. Rudebusch, 2002. "Assessing the Lucas critique in monetary policy models," Working Paper Series 2002-02, Federal Reserve Bank of San Francisco.
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  4. Coenen, Günter & Wieland, Volker, 2002. "A Small Estimated Euro Area Model with Rational Expectations and Nominal Rigidities," CEPR Discussion Papers 3574, C.E.P.R. Discussion Papers.
  5. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
  6. Tillmann, Peter, 2005. "The New Keynesian Phillips Curve in Europe: does it fit or does it fail?," Discussion Paper Series 1: Economic Studies 2005,04, Deutsche Bundesbank, Research Centre.
  7. Kurmann, Andre, 2005. "Quantifying the uncertainty about the fit of a new Keynesian pricing model," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1119-1134, September.
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