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The New Keynesian Phillips Curve: from Sticky Inflation to Sticky Prices

  • Chengsi Zhang
  • Denise R. Osborn
  • Dong Heon Kim

The New Keynesian Phillips Curve (NKPC) model of inflation dynamics based on forward-looking expectations is of great theoretical significance in monetary policy analysis. Empirical studies, however, often find that inflation inertia, rather than inflation expectations, dominate the dynamics of the short-run aggregate supply curve. This paper examines this inconsistency by investigating multiple structural changes in the NKPC for the US over 1968-2005. Both inflation expectations survey data and a rational expectations approximation are used to capture expectations. We find that forward-looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing support for the empirical coherence of sticky prices models over the last two decades. A further break in the intercept of the NKPC is identified around 2001 and this may be associated with monetary policy in the recent period.

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Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 0631.

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Date of creation: 2006
Handle: RePEc:man:sespap:0631
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