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The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation

  • George S. Tavlas

    ()

    (Bank of Greece, Economic Research Department)

  • P.A.V.B. Swamy

    (US Bureau of Labour Statistics)

A theoretical analysis of the new Keynesian Phillips curve (NKPC) is provided, formulating the conditions under which the NKPC coincides with a real-world relation that is not spurious or misspecified. A time-varying-coefficient (TVC) model, involving only observed variables, is shown to exactly represent the underlying “true” NKPC under certain conditions. In contrast, “hybrid” NKPC models, which add lagged-inflation and supply-shock variables, are shown to be spurious and misspecified. We also show how to empirically implement the NKPC under the assumption that expectations are formed rationally.

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Paper provided by Bank of Greece in its series Working Papers with number 34.

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Length: 24 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:bog:wpaper:34
Contact details of provider: Web page: http://www.bankofgreece.gr
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