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

  • Paloviita , Maritta

    ()

    (Bank of Finland Research)

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, di-rect measures, ie Consensus Economics survey data are used to proxy economic agents’ inflation expecta-tions. 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 expecta-tions. Consequently, even allowing for possible non-rationality in expectations, a lagged inflation term enters the New Keynesian Phillips curve for inflation dynamics in Europe.

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

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Length: 32 pages
Date of creation: 11 Oct 2005
Date of revision:
Publication status: Forthcoming in Applied Economics.
Handle: RePEc:hhs: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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  20. Paloviita, Maritta, 2005. "The role of expectations in euro area inflation dynamics," Scientific Monographs E:32/2005, Bank of Finland.
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