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Investigating the structural stability of the Phillips curve relationship

Author

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  • Jan J J Groen

    (Federal Reserve Bank of New York)

  • Haroon Mumtaz

    (Bank of England)

Abstract

The reduced-form correlation between inflation and measures of real activity has changed substantially for the main developed economies over the post-WWII period. In this paper we attempt to describe the observed inflation dynamics in the United Kingdom, the United States and the euro area with a sequence of New Keynesian Phillips Curve (NKPC) equations that are log-linearised around different, non-zero, steady-state inflation levels. In doing this, we follow a two-step estimation strategy. First, we model the time variation in the relationship between inflation and a real cost-based measure of activity through a Markov-switching vector autoregressive model. We then impose the cross-equation restrictions of a Calvo pricing-based NKPC under non-zero steady-state inflation and estimate the structural parameters by minimising for each inflation state the distance between the restricted and unrestricted vector autoregressive parameters. The structural estimation results indicate that for all the economies there is evidence for a structurally invariant NKPC, albeit with a significant backward-looking component.

Suggested Citation

  • Jan J J Groen & Haroon Mumtaz, 2008. "Investigating the structural stability of the Phillips curve relationship," Bank of England working papers 350, Bank of England.
    • Handle: RePEc:boe:boeewp:0350
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    Cited by:

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    2. Barnett, William A. & Chen, Guo, 2015. "Bifurcation of Macroeconometric Models and Robustness of Dynamical Inferences," Foundations and Trends(R) in Econometrics, now publishers, vol. 8(1-2), pages 1-144, September.
    3. Barnett, William A. & Duzhak, Evgeniya A., 2019. "Structural Stability Of The Generalized Taylor Rule," Macroeconomic Dynamics, Cambridge University Press, vol. 23(4), pages 1664-1678, June.
    4. Barnett, Alina & Mumtaz, Haroon & Theodoridis, Konstantinos, 2014. "Forecasting UK GDP growth and inflation under structural change. A comparison of models with time-varying parameters," International Journal of Forecasting, Elsevier, vol. 30(1), pages 129-143.
    5. Barrera-Chaupis, Carlos, 2014. "La relación entre los ciclos discretos en la inflación y el crecimiento: Perú 1993-2012 [The relationship between inflation's and growth's discrete cycles: Peru 1993-2012]," MPRA Paper 60959, University Library of Munich, Germany.
    6. Miles, William & Vijverberg, Chu-Ping, 2011. "Formal targets, central bank independence and inflation dynamics in the UK: A Markov-Switching approach," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 644-655.
    7. Jan J. J. Groen & Richard Paap & Francesco Ravazzolo, 2013. "Real-Time Inflation Forecasting in a Changing World," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(1), pages 29-44, January.
    8. Philip Liu & Haroon Mumtaz, 2011. "Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov Switching DSGE Model for the UK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1443-1474, October.
    9. Groen, Jan J.J. & Kapetanios, George, 2016. "Revisiting useful approaches to data-rich macroeconomic forecasting," Computational Statistics & Data Analysis, Elsevier, vol. 100(C), pages 221-239.
    10. Gbaguidi, David Sedo, 2011. "Regime Switching in a New Keynesian Phillips Curve with Non-zero Steady-state Inflation Rate," MPRA Paper 35481, University Library of Munich, Germany.
    11. Vugar Ahmadov & Shaig Adigozalov & Salman Huseynov & Fuad Mammadov & Vugar Rahimov, 2016. "Forecasting inflation in post-oil boom years: A case for non-linear models?," Working Papers 1601, Central Bank of Azerbaijan Republic.
    12. Vugar Ahmadov & Salman Huseynov & Shaig Adigozalov & Fuad Mammadov & Vugar Rahimov, 2018. "Forecasting inflation in post-oil boom years: A case for regime switches?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(2), pages 369-385, April.
    13. David Gbaguidi, 2012. "La courbe de Phillips : temps d’arbitrage et/ou arbitrage de temps," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(1), pages 87-119.
    14. Kuttner, Ken & Robinson, Tim, 2010. "Understanding the flattening Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 110-125, August.
    15. Gbaguidi DAVID, 2011. "Expectations Impact On The Effectiveness Of The Inflation-Real Activity Trade-Off," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 2(2), pages 141-181.
    16. Colin Ellis & Haroon Mumtaz & Pawel Zabczyk, 2014. "What Lies Beneath? A Time‐varying FAVAR Model for the UK Transmission Mechanism," Economic Journal, Royal Economic Society, vol. 0(576), pages 668-699, May.
    17. Philip Liu & Haroon Mumtaz, 2011. "Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov Switching DSGE Model for the UK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1443-1474, October.
    18. Haroon Mumtaz & Laura Sunder‐Plassmann, 2013. "Time‐Varying Dynamics Of The Real Exchange Rate: An Empirical Analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(3), pages 498-525, April.

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    Keywords

    New Keynesian Phillips Curve; trend inflation; Markov-switching VAR; minimum distance estimation.;
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