Issues in Estimating New-Keynesian Phillips Curves in the Presence of Unknown Structural Change

Mariano Kulish and Adrian Pagan

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Structural change has been conjectured to lead to an upward bias in the estimated forward expectations coefficient in New-Keynesian Phillips curves. We present a simple New-Keynesian model that enables us to assess this proposition. In particular, we investigate the issue of upward bias in the estimated coefficients of the expectations variable in the New-Keynesian Phillips curve based on a model where we can see what causes the structural breaks and how to control for them. We find that structural breaks in the means of the series can often change the properties of instruments a great deal, and may well be a bigger source of small-sample bias than that due to specification error. Moreover, we also find that the direction of the specification bias is not predictable. It is necessary to check for weak instruments before deciding that the magnitude of any estimator bias reflects specification errors coming from structural change.

Keywords: expectations; structural change; regime change; weak instruments; IV estimation; Phillips curves (search for similar items in EconPapers)
JEL-codes: C13 C32 C63 E52 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-ecm and nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Issues in Estimating New Keynesian Phillips Curves in the Presence of Unknown Structural Change (2016)
Working Paper: Issues in Estimating New Keynesian Phillips Curves in the Presence of Unknown Structural Change (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2013-11

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