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Productivity Shocks and the New Keynesian Phillips Curve: Evidence from US and Euro Area

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  • Gene Ambrocio
  • Tae-Seok Jang
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    Abstract

    This paper seeks to understand dynamics of inflation and marginal cost (labor share) in models that account for the inclusion of productivity shocks in standard New Keynesian Phillips Curve (NKPC). The question of interest is on the empirical importance of and whether productivity shocks shift the Phillips curve using U.S. and Euro area data. Highlighting the inclusion of productivity growth, we employ a hybrid model specification augmented with a productivity term. The model is estimated using the Generalized Method of Moments (GMM) following Gali and Gertler (1999). Our main finding is that a simple extension of the baseline and hybrid models using more recent data (2006:Q4 for the US and 2005:Q4 for the Euro area) yield less convincing results than the previous literature. Furthermore, our estimation results provide some support for the inclusion of productivity growth particularly for the US. We conclude that a better understanding of the inflation-unemployment tradeoff requires accounting for shifts in the Phillips Curve due to productivity shocks

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    File URL: https://www.ifw-kiel.de/education/advanced-studies-program/kiel-advanced-studies-working-paper-series/2009/ambrocio-jang.pdf
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    Paper provided by Kiel Institute for the World Economy in its series Kiel Advanced Studies Working Papers with number 453.

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    Length: 15 pages
    Date of creation: Sep 2009
    Date of revision:
    Handle: RePEc:kie:kieasw:453
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    Keywords: New Keynesian; Phillips Curve; Productivity Growth; GMM;

    Find related papers by JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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    1. Marika Karanassou & Hector Sala & Dennis J. Snower, 2010. "Phillips Curves And Unemployment Dynamics: A Critique And A Holistic Perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 1-51, 02.
    2. Marika Karanassou & Hector Sala, 2012. "Productivity Growth And The Phillips Curve: A Reassessment Of The Us Experience," Bulletin of Economic Research, Wiley Blackwell, vol. 64(3), pages 344-366, 07.
    3. Jeremy Rudd & Karl Whelan, 2006. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," American Economic Review, American Economic Association, vol. 96(1), pages 303-320, March.
    4. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
    5. Muto, Ichiro, 2007. "Estimating a New Keynesian Phillips Curve with a Corrected Measure of Real Marginal Cost: Evidence in Japan," MPRA Paper 4662, University Library of Munich, Germany.
    6. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
    7. Hatton, Timothy J., 2002. "Can Productivity Growth Explain NAIRU? Long-run Evidence from Britain, 1871-1999," CEPR Discussion Papers 3424, C.E.P.R. Discussion Papers.
    8. Jeremy Rudd & Karl Whelan, 2005. "Modelling inflation dynamics: a critical review of recent research," Finance and Economics Discussion Series 2005-66, Board of Governors of the Federal Reserve System (U.S.).
    9. Peter Tillmann, 2009. "The New Keynesian Phillips curve in Europe: does it fit or does it fail?," Empirical Economics, Springer, vol. 37(3), pages 463-473, December.
    10. Jeremy Rudd & Karl Whelan, 2001. "New tests of the New-Keynesian Phillips curve," Finance and Economics Discussion Series 2001-30, Board of Governors of the Federal Reserve System (U.S.).
    11. Jondeau, Eric & Le Bihan, Herve, 2005. "Testing for the New Keynesian Phillips Curve. Additional international evidence," Economic Modelling, Elsevier, vol. 22(3), pages 521-550, May.
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