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Estimating New Keynesian Phillips Curves Using Exact Methods

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  • Lynda Khalaf
  • Maral Kichian

Abstract

The authors use simple new finite-sample methods to test the empirical relevance of the New Keynesian Phillips curve (NKPC) equation. Unlike tests based on the generalized method of moments, the generalized Anderson-Rubin (1949) tests are immune to the presence of weak instruments and allow, by construction, the identification status of a model to be assessed. The authors illustrate their results using Gali and Gertler's (1999) NKPC specifications and data, as well as a survey-based inflation-expectation series from the Federal Reserve Bank of Philadelphia. The test the authors use rejects Gali and Gertler's estimates (conditional on the latters' choice of instruments). Nevertheless, and in contrast with results obtained by Ma (2002), the authors do obtain relatively informative confidence sets. This provides support for NKPC equations and illustrates the usefulness of using exact procedures in estimations based on instrumental variables. The authors' results also reveal that the least well-identified parameter is w; namely, the proportion of firms that do not adjust their prices in period t.

Suggested Citation

  • Lynda Khalaf & Maral Kichian, 2004. "Estimating New Keynesian Phillips Curves Using Exact Methods," Staff Working Papers 04-11, Bank of Canada.
  • Handle: RePEc:bca:bocawp:04-11
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    References listed on IDEAS

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    1. Kleibergen, Frank & Zivot, Eric, 2003. "Bayesian and classical approaches to instrumental variable regression," Journal of Econometrics, Elsevier, pages 29-72.
    2. Edith Gagnon & Hashmat Khan, 2001. "New Phillips Curve with Alternative Marginal Cost Measures forCanada, the United States, and the Euro Area," Staff Working Papers 01-25, Bank of Canada.
    3. Zivot, Eric & Startz, Richard & Nelson, Charles R, 1998. "Valid Confidence Intervals and Inference in the Presence of Weak Instruments," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1119-1146, November.
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    5. Jeffrey C. Fuhrer, 1995. "The [un]importance of forward-looking behavior in price specifications," Working Papers 95-6, Federal Reserve Bank of Boston.
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    7. Marcelo J. Moreira, 2003. "A General Theory of Hypothesis Testing in the Simultaneous Equations Model," Harvard Institute of Economic Research Working Papers 1992, Harvard - Institute of Economic Research.
    8. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
    9. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
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    19. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
    20. Ma, Adrian, 2002. "GMM estimation of the new Phillips curve," Economics Letters, Elsevier, vol. 76(3), pages 411-417, August.
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    Citations

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    Cited by:

    1. Nejla Adanur Aklan & Mehmet Nargelecekenler, 2008. "Taylor Rule in Practice: Evidence from Turkey," International Advances in Economic Research, Springer;International Atlantic Economic Society, pages 156-166.
    2. M. Ege Yazgan & Hakan Yilmazkuday, 2007. "Monetary policy rules in practice: evidence from Turkey and Israel," Applied Financial Economics, Taylor & Francis Journals, pages 1-8.
    3. Dufour, Jean-Marie & Khalaf, Lynda & Kichian, Maral, 2006. "Inflation dynamics and the New Keynesian Phillips Curve: An identification robust econometric analysis," Journal of Economic Dynamics and Control, Elsevier, pages 1707-1727.
    4. repec:kap:iaecre:v:14:y:2008:i:2:p:156-166 is not listed on IDEAS
    5. Paloviita, Maritta, 2005. "The role of expectations in euro area inflation dynamics," Scientific Monographs, Bank of Finland, number 2005_032, November.
    6. Jean-Yves Duclos & Bernard Fortin & Andrée-Anne Fournier, 2009. "An Analysis of Effective Marginal Tax Rates in Quebec," Canadian Public Policy, University of Toronto Press, vol. 35(3), pages 344-371, September.
    7. Paloviita, Maritta, 2008. "Dynamics of inflation expectations in the euro area," Scientific Monographs, Bank of Finland, number 40/2008, November.
    8. Chaouech, Olfa, 2015. "Taylor rule in practice: Evidence from Tunisia," MPRA Paper 74628, University Library of Munich, Germany, revised 16 Oct 2016.
    9. Yazgan M. Ege & Yilmazkuday Hakan, 2005. "Inflation Dynamics of Turkey: A Structural Estimation," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, pages 1-15.
    10. Hakan, Yilmazkuday, 2009. "Is there a Role for International Trade Costs in Explaining the Central Bank Behavior?," MPRA Paper 15951, University Library of Munich, Germany.

    More about this item

    Keywords

    Econometric and statistical methods; Inflation and prices;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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