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The New Keynesian Phillips Curve and the Role of Expectations: Evidence from the Ifo World Economic Survey

Listed author(s):
  • Steffen Henzel
  • Timo Wollmershäuser

We provide evidence on the fit of the hybrid New Keynesian Phillips curve for selected euro zone countries, the US and the UK. Instead of imposing rational expectations and estimating the Phillips curve by the Generalized Method of Moments, we follow Roberts (1997) and Adam and Padula (2003) and use direct measures of inflation expectations. The data source is the Ifo World Economic Survey, which quarterly polls economic experts about their expected future development of inflation. Our main findings are as follows: (i) In comparison with the rational expectations approach, backward-looking behaviour turns out to more relevant for most countries in our sample. (ii) The use of survey data for inflation expectations yields a positive slope of the Phillips curve when the output gap is used as a measure for marginal cost.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2006/wp-cesifo-2006-03/cesifo1_wp1694.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1694.

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Date of creation: 2006
Handle: RePEc:ces:ceswps:_1694
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  1. Paloviita, Maritta, 2004. "Inflation dynamics in the euro area and the role of expectations : further results," Research Discussion Papers 21/2004, Bank of Finland.
  2. Klaus Adam & Mario Padula, 2002. "Inflation Dynamics and Subjective Expectations in the United States," CSEF Working Papers 78, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 02 Jun 2009.
  3. Benigno, Pierpaolo & López-Salido, David, 2002. "Inflation persistence and optimal monetary policy in the euro area," Working Paper Series 0178, European Central Bank.
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  6. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
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  8. Fabio Rumler, 2005. "Estimates of the Open Economy New Keynesian Phillips Curve for Euro Area Countries," Working Papers 102, Oesterreichische Nationalbank (Austrian Central Bank).
  9. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Rudd, Jeremy & Whelan, Karl, 2005. "New tests of the new-Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1167-1181, September.
  11. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, vol. 42(166), pages 123-138, May.
  12. Jordi Galí & Mark Gertler & J. David López-Salido, 2001. "Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve," Working Papers 44, Barcelona Graduate School of Economics.
  13. Fuhrer, Jeffrey C. & Moore, George R. & Schuh, Scott D., 1995. "Estimating the linear-quadratic inventory model Maximum likelihood versus generalized method of moments," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 115-157, February.
  14. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
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  17. Chowdhury, Ibrahim & Hoffmann, Mathias & Schabert, Andreas, 2004. "Inflation dynamics and the cost channel of monetary transmission," CFR Working Papers 04-01, University of Cologne, Centre for Financial Research (CFR).
  18. Mankiw, N. Gregory & Reis, Ricardo, 2002. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Scholarly Articles 3415324, Harvard University Department of Economics.
  19. Maritta Paloviita, 2006. "Inflation Dynamics in the Euro Area and the Role of Expectations," Empirical Economics, Springer, vol. 31(4), pages 847-860, November.
  20. Campbell Leith & Jim Malley, 2003. "Estimated Open Economy New Keynesian Phillips Curves for the G7," CESifo Working Paper Series 834, CESifo Group Munich.
  21. Sbordone, Argia M., 2005. "Do expected future marginal costs drive inflation dynamics?," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1183-1197, September.
  22. Steffen Henzel & Timo Wollmershäuser, 2006. "Quantifying Inflation Expectations with the Carlson-Parkin Method: A Survey-based Determination of the Just Noticeable Difference," Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2005(3), pages 321-352.
  23. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
  24. Angeloni, Ignazio & Ehrmann, Michael, 2004. "Euro area inflation differentials," Working Paper Series 0388, European Central Bank.
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