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Inflation dynamics and the New Keynesian Phillips Curve: an identification robust econometric analysis

  • DUFOUR, Jean-Marie Dufour
  • KHALAF, Lynda
  • KICHIAN, Maral

In this paper, we use identification-robust methods to assess the empirical adequacy of a New Keynesian Phillips Curve (NKPC) equation. We focus on the Gali and Gertler’s (1999) specification, on both U.S. and Canadian data. Two variants of the model are studied: one based on a rationalexpectations assumption, and a modification to the latter which consists in using survey data on inflation expectations. The results based on these two specifications exhibit sharp differences concerning: (i) identification difficulties, (ii) backward-looking behavior, and (ii) the frequency of price adjustments. Overall, we find that there is some support for the hybrid NKPC for the U.S., whereas the model is not suited to Canada. Our findings underscore the need for employing identificationrobust inference methods in the estimation of expectations-based dynamic macroeconomic relations.

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File URL: http://hdl.handle.net/1866/546
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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2005-17.

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Length: 26 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:mtl:montde:2005-17
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