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Estimating Phillips curves in turbulent times using the ECB's survey of professional forecasters

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  • Onorante, Luca
  • Koop, Gary

Abstract

This paper uses forecasts from the European Central Bank’s Survey of Professional Forecasters to investigate the relationship between inflation and inflation expectations in the euro area. We use theoretical structures based on the New Keynesian and Neoclassical Phillips curves to inform our empirical work and dynamic model averaging in order to ensure an econometric specification capturing potential changes. We use both regression-based and VAR-based methods. The paper confirms that there have been shifts in the Phillips curve and identifies three sub-periods in the EMU: an initial period of price stability, a few years where inflation was driven mainly by external shocks, and the financial crisis, where the New Keynesian Phillips curve outperforms alternative formulations. This finding underlines the importance of introducing informed judgment in forecasting models and is also important for the conduct of monetary policy, as the crisis entails changes in the effect of expectations on inflation and a resurgence of the “sacrifice ratio”. JEL Classification: E31, C53, C11

Suggested Citation

  • Onorante, Luca & Koop, Gary, 2012. "Estimating Phillips curves in turbulent times using the ECB's survey of professional forecasters," Working Paper Series 1422, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20121422
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    References listed on IDEAS

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    Cited by:

    1. Jaromir Baxa & Miroslav Plasil & Borek Vasicek, 2013. "Inflation and the Steeplechase Between Economic Activity Variables," Working Papers 2013/15, Czech National Bank, Research Department.
    2. Baxa, Jaromír & Plašil, Miroslav & Vašíček, Bořek, 2015. "Changes in inflation dynamics under inflation targeting? Evidence from Central European countries," Economic Modelling, Elsevier, vol. 44(C), pages 116-130.
    3. Guérin, Pierre & Leiva-Leon, Danilo, 2017. "Model averaging in Markov-switching models: Predicting national recessions with regional data," Economics Letters, Elsevier, vol. 157(C), pages 45-49.
    4. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-188, March.
    5. Croonenbroeck, Carsten & Stadtmann, Georg, 2012. "Evaluating Phillips curve based inflation forecasts in Europe: A note," Discussion Papers 329, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
    6. Lanne, Markku & Luoto, Jani, 2013. "Autoregression-based estimation of the new Keynesian Phillips curve," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 561-570.
    7. repec:eee:joecas:v:14:y:2016:i:pa:p:20-28 is not listed on IDEAS
    8. López Pérez, Víctor, 2015. "Do professional forecasters behave as if they believed in the new Keynesian Phillips Curve for the euro area?," Working Paper Series 1763, European Central Bank.
    9. Schleer, Frauke & Kappler, Marcus, 2014. "The Phillips Curve: (In)stability, the role of credit, and implications for potential output measurement," ZEW Discussion Papers 14-067, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    10. repec:kap:empiri:v:44:y:2017:i:2:d:10.1007_s10663-016-9322-x is not listed on IDEAS
    11. repec:rfa:aefjnl:v:4:y:2017:i:3:p:77-88 is not listed on IDEAS
    12. Oinonen, Sami & Paloviita, Maritta & Vilmi, Lauri, 2013. "How have inflation dynamics changed over time? : Evidence from the euro area and USA," Research Discussion Papers 6/2013, Bank of Finland.
    13. Víctor López-Pérez, 2017. "Do professional forecasters behave as if they believed in the New Keynesian Phillips Curve for the euro area?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 44(1), pages 147-174, February.
    14. repec:bpj:bejmac:v:17:y:2017:i:1:p:42:n:3 is not listed on IDEAS
    15. Choi, Yoonseok & Kim, Sunghyun, 2016. "Testing an alternative price-setting behavior in the new Keynesian Phillips curve: Extrapolative price-setting mechanism," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 253-265.

    More about this item

    Keywords

    Bayesian; financial crisis; inflation expectations; Phillips curve; Survey of Professional Forecasters;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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