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Comparing alternative Phillips curve specifications : European results with survey-based expectations

Listed author(s):
  • Paloviita, Maritta
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    This paper examines inflation dynamics in Europe.Econometric specification tests with pooled European data are used to compare the empirical performance of the New Classical, New Keynesian and Hybrid specifications of the Phillips curve.Instead of imposing any specific form of expectations formation, direct measures, ie Consensus Economics survey data are used to proxy economic agents' inflation expectations.According to the results, the New Classical Phillips curve has satisfactory statistical properties.Moreover, the purely forward-looking New Keynesian Phillips curve is clearly outperformed by the New Classical and Hybrid Phillips curves.We interpret our results as indicating that the European inflation process is not purely forward-looking, and inflation cannot instantaneously adjust to changes in expectations.Consequently, even allowing for possible non-rationality in expectations, a lagged inflation term enters the New Keynesian Phillips curve for inflation dynamics in Europe.Key words: Phillips curve, expectations, Europe JEL classification numbers: E31, C52

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    Paper provided by Bank of Finland in its series Research Discussion Papers with number 22/2005.

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    Date of creation: 2005
    Publication status: Published in Published in Applied Economics, Volume 40, Issue 17, September 2008, pp. 2259-2270
    Handle: RePEc:bof:bofrdp:2005_022
    Contact details of provider: Postal:
    Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland

    Web page: http://www.suomenpankki.fi/en/

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