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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 backward-looking inflation inertia dominates the dynamics of the short-run aggregate supply curve. This inconsistency is examined by investigating multiple structural changes in the NKPC for the U.S. between 1960 and 2005, employing both inflation expectations survey data and a rational expectations approximation. 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 empirical support for sticky price models over the last two decades. A break in the intercept of the NKPC is also identified around 2001 and this may be associated with U.S. monetary policy in that period. Copyright (c) 2008 The Ohio State University.

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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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Handle: RePEc:man:sespap:0631
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