Evaluating the German (New Keynesian) Phillips Curve
This paper evaluates the New Keynesian Phillips Curve (NKPC) and its hybrid variant within a limited information framework for Germany. The main interest rests on the average frequency of price re-optimization of ﬁrms. We use the labor income share as the driving variable and consider a source of real rigidity by allowing for a ﬁxed ﬁrm-speciﬁc capital stock. A GMM estimation strategy is employed as well as an identiﬁcation robust method that is based upon the Anderson-Rubin statistic. We ﬁnd out that the German Phillips Curve is purely forward looking. Moreover, our point estimates are consistent with the view that ﬁrms re-optimize prices every two to three quarters. While these estimates seem plausible from an economic point of view, the uncertainties around these estimates are very large and also consistent with perfect nominal price rigidity where ﬁrms never re-optimize prices. This analysis also oﬀers some explanations why previous results for the German NKPC based on GMM diﬀer considerably. First, standard GMM results are very sensitive to the way how orthogonality conditions are formulated. Additionally, model misspeciﬁcations may be left undetected by conventional J tests. Taken together, this analysis points out the need for identiﬁcation robust methods to get reliable estimates for the NKPC.
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