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A Search for a Structural Phillips Curve

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  • Tim W. Cogley
  • Argia M. Sbordone

    (Department of Economics, University of California Davis)

Abstract

The foundation of the New Keynesian Phillips curve is a model of pricesetting with nominal rigidities which implies that the dynamics of inflation arewell explained by the evolution of real marginal costs. The objective of this paperis to analyze whether this is a structurally-invariant relationship. To assessthis, we first estimate an unrestricted time-series model for inflation, unit laborcosts, and other variables, and present evidence that their joint dynamics arewell represented by a vector autoregression with drifting coefficients and volatilities,as in Cogley and Sargent (2004). Then, following Sbordone (2002, 2003),we apply a two-step minimum distance estimator to estimate deep parameters.Taking as given estimates of the unrestricted VAR, we estimate parametersof the NKPC by minimizing a quadratic function of the restrictions that thetheoretical model imposes on the reduced form. Our results suggest that it ispossible to reconcile a constant-parameter NKPC with the drifting-parameterVAR, and therefore we argue that the price-setting model is structurally invariant.

Suggested Citation

  • Tim W. Cogley & Argia M. Sbordone, 2005. "A Search for a Structural Phillips Curve," Working Papers 292, University of California, Davis, Department of Economics.
  • Handle: RePEc:cda:wpaper:292
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    More about this item

    Keywords

    Inflation; Phillips curve; time-varying VAR.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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