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Identifying the New Keynesian Phillips Curve

Author

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  • James M. Nason

    () (Federal Reserve Bank of Atlanta)

  • Gregor W. Smith

    () (Queen's University)

Abstract

Phillips curves are central to discussions of inflation dynamics and monetary policy. New Keynesian Phillips curves describe how past inflation, expected future inflation, and a measure of real marginal cost or an output gap drive the current inflation rate. This paper studies the (potential) weak identification of these curves under GMM and traces this syndrome to a lack of persistence in either exogenous variables or shocks. We employ analytic methods to understand the identification problem in several statistical environments: under strict exogeneity, in a vector autoregression, and in the canonical three-equation, New Keynesian model. Given U.S., U.K., and Canadian data, we revisit the empirical evidence and construct tests and confidence intervals based on exact and pivotal Anderson-Rubin statistics that are robust to weak identification. These tests find little evidence of forward-looking inflation dynamics.

Suggested Citation

  • James M. Nason & Gregor W. Smith, 2005. "Identifying the New Keynesian Phillips Curve," Working Papers 1026, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1026
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    Keywords

    Phillips curve; Keynesian; identification; inflation;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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