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Time-Varying Phillips Curves

  • Joseph S. Vavra

A growing theoretical literature argues that aggregate price flexibility and the inflation-output tradeoff faced by central banks should rise with microeconomic price change dispersion. However, there is little empirical work testing this prediction. I fill this gap by estimating time-varying forward looking New-Keynesian Phillips Curves (NKPC). I reject a NKPC with constant inflation-output tradeoff in favor of a slope that increases with microeconomic volatility. In contrast, there is no evidence that the inflation-output tradeoff varies with aggregate volatility or the business cycle more generally. Furthermore, I show that greater volatility does not affect price flexibility purely through increases in frequency.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19790.

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Date of creation: Jan 2014
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Handle: RePEc:nbr:nberwo:19790
Note: EFG ME
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  1. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  2. David Berger & Joseph S. Vavra, 2013. "Volatility and Pass-through," NBER Working Papers 19651, National Bureau of Economic Research, Inc.
  3. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-29, October.
  4. Jordi Galí & Mark Gertler & David López-Salido, 2005. "Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve," Banco de Espa�a Working Papers 0520, Banco de Espa�a.
  5. Mark Gertler & John Leahy, 2006. "A Phillips Curve with an Ss Foundation," NBER Working Papers 11971, National Bureau of Economic Research, Inc.
  6. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  7. Joseph S. Vavra, 2013. "Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation," NBER Working Papers 19148, National Bureau of Economic Research, Inc.
  8. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen J. Terry, 2012. "Really Uncertain Business Cycles," NBER Working Papers 18245, National Bureau of Economic Research, Inc.
  9. Loukas Karabarbounis & Brent Neiman, 2013. "The Global Decline of the Labor Share," NBER Working Papers 19136, National Bureau of Economic Research, Inc.
  10. repec:oup:qjecon:v:129:y:2013:i:1:p:215-258 is not listed on IDEAS
  11. Ruediger Bachmann & Benjamin Born & Steffen Elstner & Christian Grimme, 2013. "Time-Varying Business Volatility, Price Setting, and the Real Effects of Monetary Policy," NBER Working Papers 19180, National Bureau of Economic Research, Inc.
  12. repec:oup:qjecon:v:129:y:2013:i:1:p:61-103 is not listed on IDEAS
  13. Luis F. Céspedes & Marcelo Ochoa & Claudio Soto, 2005. "The New Keynesian Phillips Curve in an Emerging Market Economy: The Case of Chile," Working Papers Central Bank of Chile 355, Central Bank of Chile.
  14. Julio Blanco & Isaac Baley, 2013. "Learning to Price," 2013 Meeting Papers 663, Society for Economic Dynamics.
  15. James H. Stock & Mark W. Watson, 2010. "Modeling Inflation After the Crisis," NBER Working Papers 16488, National Bureau of Economic Research, Inc.
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