Trend Inflation and the Nature of Structural Breaks in the New Keynesian Phillips Curve

Chang-Jin Kim (), Pym Manopimoke and Charles Nelson

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we investigate the nature of structural breaks in inflation by estimating a version of the New Keynesian Phillips curve (NKPC) in the presence of a unit root in inflation. We show that, with a unit root in inflation, the NKPC implies an unobserved components model that consists of three components: a stochastic trend component, a component that depends upon current and future forecasts of real economic activity, and a stationary component which is potentially serially correlated (or a component of inflation that is not explained by the conventional forward-looking NKPC). Our empirical results suggest that, with an increase in trend inflation during the Great Inflation period, the response of inflation to real economic activity decreases and the persistence of the inflation gap increases due to an increase in the persistence of the unobserved stationary component. These results are in line with the predictions of Cogley and Sbordone (2008), who show that the coefficients of the NKPC are functions of time-varying trend inflation.

Keywords: New Keynesian Phillips Curve; Trend Inflation; Inflation Gap; Unobserved Components Model; Structural Breaks (search for similar items in EconPapers)
JEL-codes: E3 E31 (search for similar items in EconPapers)
Date: 2013-02-01
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/51356/1/MPRA_paper_51356.pdf original version (application/pdf)

Related works:
Working Paper: Trend Inflation and the Nature of Structural Breaks in the New Keynesian Phillips Curve (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:51356

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().