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Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve

  • Jordi Galí

    ()

    (Universitat Pompeu Fabra)

  • Mark Gertler

    ()

    (New York University)

  • David López-Salido

    ()

    (Banco de España)

Galí and Gertler (1999) developed a hybrid variant of the New Keynesian Phillips curve that relates inflation to real marginal cost, expected future inflation and lagged inflation. GMM estimates of the model suggest that forward looking behavior is dominant: The coefficient on expected future inflation substantially exceeds the coefficient on lagged inflation. While the latter differs significantly from zero, it is quantitatively modest. Several authors have suggested that our results are the product of specification bias or suspect estimation methods. Here we show that these claims are incorrect, and that our results are robust to a variety of estimation procedures, including GMM estimation of the closed form, and nonlinear instrumental variables. Also, as we discuss, many others have obtained very similar results to ours using a systems approach, including FIML techniques. Hence, the conclusions of GG and others regarding the importance of forward looking behavior remain robust.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/05/Fic/dt0520e.pdf
File Function: First version, August 2005
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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0520.

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Length: 21 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:bde:wpaper:0520
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  1. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  2. Tim W. Cogley & Argia M. Sbordone, 2005. "A Search for a Structural Phillips Curve," Working Papers 510, University of California, Davis, Department of Economics.
  3. Peter N. Ireland, 1999. "Sticky-Price Models of the Business Cycle: Specification and Stability," Boston College Working Papers in Economics 426, Boston College Department of Economics.
  4. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  5. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
  6. Sbordone, Argia M., 2005. "Do expected future marginal costs drive inflation dynamics?," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1183-1197, September.
  7. Frank Smets & Raf Wouters, 2004. "Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE approach," Working Paper Research 61, National Bank of Belgium.
  8. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers 653, Stockholm - International Economic Studies.
  9. N. Gregory Mankiw, 2000. "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," Harvard Institute of Economic Research Working Papers 1905, Harvard - Institute of Economic Research.
  10. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  11. Galí, Jordi & Gertler, Mark & López-Salido, J David, 2001. "European Inflation Dynamics," CEPR Discussion Papers 2684, C.E.P.R. Discussion Papers.
  12. 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.
  13. André Kurmann, 2004. "Maximum Likelihood Estimation of Dynamic Stochastic Theories with an Application to New Keynesian Pricing," Cahiers de recherche 0421, CIRPEE.
  14. Argia M. Sbordone, 2005. "A Limited Information Approach to the Simultaneous Estimation of Wage and Price Dynamics," Computing in Economics and Finance 2005 321, Society for Computational Economics.
  15. Lindé, Jesper, 2001. "Estimating New-Keynesian Phillips Curves: A Full Information Maximum Likelihood Approach," Working Paper Series 129, Sveriges Riksbank (Central Bank of Sweden), revised 30 Apr 2001.
  16. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
  17. Jeremy Rudd & Karl Whelan, 2001. "New tests of the New-Keynesian Phillips curve," Finance and Economics Discussion Series 2001-30, Board of Governors of the Federal Reserve System (U.S.).
  18. Gali, Jordi & Gertler, Mark & David Lopez-Salido, J., 2003. "Erratum to "European inflation dynamics": [European Economic Review 45 (2001), 1237-1270]," European Economic Review, Elsevier, vol. 47(4), pages 759-760, August.
  19. Collard, Fabrice & Dellas, Harris, 2004. "The New Keynesian Model with Imperfect Information and Learning," IDEI Working Papers 273, Institut d'Économie Industrielle (IDEI), Toulouse.
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