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Derivation and Estimation of a New Keynesian Phillips Curve in a Small Open Economy

  • Holmberg, Karolina

    ()

    (Monetary Policy Department, Central Bank of Sweden)

Registered author(s):

    In recent years, it has become increasingly common to estimate New Keynesian Phillips curves with a measure of firms' real marginal cost as the real driving variable. It has been argued that this measure is both theoretically and empirically superior to the traditional output gap. In this paper, a marginal-cost based New Keynesian Phillips curve is estimated on Swedish data by means of GMM and Full Information Maximum Likelihood. The results show that with real marginal cost in the structural equation the point estimates generally have the exptected positive sign, which is less frequently the case using the output gap in the Phillips curve equation. This suggests that real marginal cost might be a more adequate real explanatory variable for Swedish inflation than the output gap. However, standard errors in the estimations are large and it is in fact difficult to pin down a statistically significant relationship between either real marginal cost or the output gap and inflation.

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    File URL: http://www.riksbank.com/upload/Dokument_riksbank/Kat_publicerat/WorkingPapers/wp_197.pdf
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    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 197.

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    Length: 30 pages
    Date of creation: 01 May 2006
    Date of revision:
    Handle: RePEc:hhs:rbnkwp:0197
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    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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    1. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers 653, Stockholm - International Economic Studies.
    2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
    3. Karl Whelan & Jeremy Rudd, 2001. "New tests of the New-Keynesian Phillips Curve," Open Access publications 10197/249, School of Economics, University College Dublin.
    4. Soderlind, Paul, 1999. "Solution and estimation of RE macromodels with optimal policy," European Economic Review, Elsevier, vol. 43(4-6), pages 813-823, April.
    5. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages C45-61, May.
    6. Karl Whelan & Jeremy Rudd, 2002. "Does the labour share of income drive inflation?," Open Access publications 10197/233, School of Economics, University College Dublin.
    7. Jordi Galí & Mark Gertler & David López-Salido, 2005. "Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve," Working Papers 0520, Banco de España;Working Papers Homepage.
    8. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2005. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," NBER Working Papers 11034, National Bureau of Economic Research, Inc.
    9. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
    10. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
    11. Lindé, Jesper, 2001. "Estimating New-Keynesian Phillips Curves: A Full Information Maximum Likelihood Approach," Working Paper Series 129, Sveriges Riksbank (Central Bank of Sweden), revised 30 Apr 2001.
    12. Jordi Galí & Mark Gertler & J. David López-Salido, 2000. "European Inflation Dynamics," Working Papers 0020, Banco de España;Working Papers Homepage.
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    14. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
    15. Hallsten, Kerstin, 2000. "An Expectations-Augmented Phillips Curve in an Open Economy," Working Paper Series 108, Sveriges Riksbank (Central Bank of Sweden).
    16. Jordi Gali, 2002. "New Perspectives on Monetary Policy, Inflation, and the Business Cycle," NBER Working Papers 8767, National Bureau of Economic Research, Inc.
    17. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
    18. Kurmann, Andre, 2007. "VAR-based estimation of Euler equations with an application to New Keynesian pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 767-796, March.
    19. Mavroeidis, Sophocles, 2005. "Identification Issues in Forward-Looking Models Estimated by GMM, with an Application to the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 421-48, June.
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