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Inflation Dynamics and the New Keynesian Phillips Curve: An Identification-Robust Econometric Analysis

  • Jean-Marie Dufour
  • Lynda Khalaf
  • Maral Kichian

The authors use identification-robust methods to assess the empirical adequacy of a New Keynesian Phillips curve (NKPC) equation. They focus on Galí and Gertler's (1999) specification, for both U.S. and Canadian data. Two variants of the model are studied: one based on a rational-expectations assumption, and a modification to the latter that uses survey data on inflation expectations. The results based on these two specifications exhibit sharp differences concerning: (i) identification difficulties, (ii) backward-looking behaviour, and (iii) the frequency of price adjustment. Overall, the authors find that there is some support for the hybrid NKPC for the United States, whereas the model is not suited to Canada. Their findings underscore the need for employing identification-robust inference methods in the estimation of expectations-based dynamic macroeconomic relations.

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Paper provided by Bank of Canada in its series Staff Working Papers with number 05-27.

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Length: 30 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:bca:bocawp:05-27
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