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Evaluating New Keynesian Phillips Curve under VAR-Based Learning

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  • Fanelli, Luca

Abstract

This paper proposes an econometric evaluation of the New Keynesian Phillips Curve (NKPC) in the euro area, under a particular specification of the adaptive learning hypothesis. The key assumption is that agents' perceived law of motion is a Vector Autoregressive (VAR) model, whose coefficients are updated by maximum likelihood estimation as the information set increases over time. Each time new data is available, likelihood ratio tests for the cross-equation restrictions that the NKPC imposes on the VAR coefficients are computed and compared with a proper set of critical values, which take the sequential nature of the test into account. The analysis focuses on the case in which the variables can be approximated as nonstationary cointegrated processes. Results on quarterly data relative to the period 1981 - 2006 show that: (i) the euro area inflation rate and the wage share are cointegrated, although their relationship does not appear stable during the eighties and first nineties; (ii) the cointegrated version of the 'hybrid' NKPC is sharply rejected under the rational expectations hypothesis; (iii) the NKPC is rejected also when the model is evaluated under a particular formulation of the adaptive learning hypothesis over the monitoring period 1986 - 2006.

Suggested Citation

  • Fanelli, Luca, 2008. "Evaluating New Keynesian Phillips Curve under VAR-Based Learning," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 2, pages 1-24.
  • Handle: RePEc:zbw:ifweej:7400
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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2008-33
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    Cited by:

    1. Giovanni Angelini & Luca Fanelli, 2016. "Misspecification and Expectations Correction in New Keynesian DSGE Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(5), pages 623-649, October.
    2. Katarina Juselius, 2011. "On the Role of Theory and Evidence in Macroeconomics," Chapters,in: The Elgar Companion to Recent Economic Methodology, chapter 17 Edward Elgar Publishing.
    3. Ordóñez, Javier & Jusélius, Katarina, 2009. "Balassa-Samuelson and Wage, Price and Unemployment Dynamics in the Spanish Transition to EMU Membership," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-30.
    4. Jusélius, Katarina, 2009. "Special Issue on Using Econometrics for Assessing Economic Models: An Introduction," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-20.

    More about this item

    Keywords

    Adaptive learning; cointegration; cross-equation restrictions; forward-looking model; New Keynesian Phillips Curve; VAR; VEqC;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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