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The New Keynesian Phillips Curve for a Small Open Economy

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Abstract

The New Keynesian Phillips Curve (NKPC) has become the benchmark model for understanding inflation in modern monetary economics. One reason for the popularity is the microfoundation of the model, which decomposes agents' behaviour into price adjustments and deviations of the price level from its target. The empirical relevance of the NKPC is, however, a matter of debate as recent studies reveal that some supportive evidence depends crucially on the econometric methods applied. We show how to evaluate the features of the model using cointegration techniques and tests based on both single-behavioural equations and cointegrated VAR models. Our results indicate that the forward-looking part of the NKPC is most likely at odds with Norwegian data. By contrast, we establish a well-specified dynamic model interpreted as a standard backward-looking mark-up price equation. We also demonstrate that the dynamic mark-up model forecasts well post-sample and during a major change in the monetary policy regime, which certainly is strong evidence in favour of this model. Consequently, we conclude that taking account of forward-looking behaviour when modelling consumer price inflation in Norway seems unnecessary to arrive at a well-specified model by econometric criteria.

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  • Pål Boug & Ådne Cappelen & Anders Rygh Swensen, 2006. "The New Keynesian Phillips Curve for a Small Open Economy," Discussion Papers 460, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:460
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    1. Gunnar Bardsen & Eilev S. Jansen & Ragnar Nymoen, 2004. "Econometric Evaluation of the New Keynesian Phillips Curve," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(s1), pages 671-686, September.
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    10. Sophocles Mavroeidis, 2004. "Weak Identification of Forward-looking Models in Monetary Economics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(s1), pages 609-635, September.
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    Cited by:

    1. Temitope Leshoro & Umakrishnan Kollamparambil, 2016. "Inflation Or Output Targeting? Monetary Policy Appropriateness In South Africa," PSL Quarterly Review, Economia civile, vol. 69(276), pages 77-104.
    2. Vincent Dadam & Nicola Viegi, 2015. "Labour Market and Monetary Policy in South Africa," Working Papers 201569, University of Pretoria, Department of Economics.
    3. Bjørnstad, Roger & Kalstad, Kjartan Øren, 2010. "Increased price markup from union coordination: OECD panel evidence," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 4, pages 1-37.
    4. Pål Boug & Ådne Cappelen & Anders Rygh Swensen, 2007. "The New Keynesian Phillips Curve revisited," Discussion Papers 500, Statistics Norway, Research Department.
    5. Luca Fanelli, 2008. "Testing the New Keynesian Phillips Curve Through Vector Autoregressive Models: Results from the Euro Area," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(1), pages 53-66, February.
    6. Janine Aron & John Muellbauer, 2013. "New Methods for Forecasting Inflation, Applied to the US," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(5), pages 637-661, October.
    7. Aron, Janine & Muellbauer, John & Sebudde, Rachel, 2015. "Inflation forecasting models for Uganda: is mobile money relevant?," CEPR Discussion Papers 10739, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    The New Keynesian Phillips Curve; mark-up pricing; single-equation estimation methods; encompassing tests; cointegrated vector autoregressive models and equilibrium correction models.;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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