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Estimating New-Keynesian Phillips Curves: A Full Information Maximum Likelihood Approach

  • Lindé, Jesper

    ()

    (Research Department, Central Bank of Sweden)

The New-Keynesian Phillips curve has recently become an important ingredient in monetary policy models. However, using limited information methods, the empirical support for the New-Keynesian Phillips curve appear to be mixed. This paper argues, by means of Monte Carlo simulations with a simple New-Keynesian sticky price model, that single equations methods, e.g. GMM, are likely to produce imprecise and biased estimates. Then, it is argued that estimating the model with full information maximum likelihood (FIML) is a useful way of obtaining better estimates. Finally, a version of the model used in the Monte Carlo simulations is estimated on U.S. data with FIML and although the pure forward-looking New-Keynesian Phillips curve is rejected, a version with both forward- and backward-looking components provides a reasonable approximation of U.S. inflation dynamics.

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File URL: http://www.riksbank.se/upload/Dokument_riksbank/Kat_foa/WP_129Revised.pdf
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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 129.

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Length: 30 pages
Date of creation: 01 Dec 2001
Date of revision: 30 Apr 2001
Publication status: Published in Journal of Monetary Economics, 2005, pages 1135-1149.
Handle: RePEc:hhs:rbnkwp:0129
Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
Web page: http://www.riksbank.com/
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