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The new Keynesian Phillips curve: Does it fit Norwegian data?

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Abstract

We evaluate the empirical performance of the new Keynesian Phillips curve (NKPC) for a small open economy using cointegrated vector autoregressive models, likelihood based methods and general method of moments. Our results indicate that both baseline and hybrid versions of the NKPC as well as exact and inexact formulations of the rational expectation hypothesis are most likely at odds with Norwegian data. By way of contrast, we establish a well-specified dynamic backward-looking imperfect competition model (ICM), a model which encompasses the NKPC in-sample with a major monetary policy regime shift from exchange rate targeting to inflation targeting. We also demonstrate that the ICM model forecasts well both post-sample and during the recent financial crisis. Our findings suggest that taking account of forward-looking behaviour when modelling consumer price inflation is unnecessary to arrive at a well-specified model by econometric criteria.

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  • Pål Boug & Ådne Cappelen & Anders R. Swensen, 2011. "The new Keynesian Phillips curve: Does it fit Norwegian data?," Discussion Papers 652, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:652
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    File URL: https://www.ssb.no/a/publikasjoner/pdf/DP/dp652.pdf
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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.
    2. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
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    Keywords

    The new Keynesian Phillips curve; imperfect competition model; cointegrated vector autoregressive models (CVAR); equilibrium correction models; likelihood based methods and general method of moments (GMM).;

    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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