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Inflation Dynamics and the New Keynesian Phillips Curve: An Identification Robust Econometric Analysis

Listed author(s):
  • DUFOUR, Jean-Marie
  • 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 rational expectations 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 identification robust inference methods in the estimation of expectations-based dynamic macroeconomic relations.

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Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 22-2005.

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Length: 29 pages
Date of creation: 2005
Handle: RePEc:mtl:montec:22-2005
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