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Identification of New Keynesian Phillips Curves from a Global Perspective

Stephane Dees (), M Hashem Pesaran (), L. Vanessa Smith () and Ron P. Smith ()
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Ron P. Smith: Birkbeck College, University of London

Authors registered in the RePEc Author Service: Ronald Smith ()

No 3298, IZA Discussion Papers from Institute for the Study of Labor (IZA)

Abstract: New Keynesian Phillips Curves (NKPC) have been extensively used in the analysis of monetary policy, but yet there are a number of issues of concern about how they are estimated and then related to the underlying macroeconomic theory. The first is whether such equations are identified. To check identification requires specifying the process for the forcing variables (typically the output gap) and solving the model for inflation in terms of the observables. In practice, the equation is estimated by GMM, relying on statistical criteria to choose instruments. This may result in failure of identification or weak instruments. Secondly, the NKPC is usually derived as a part of a DSGE model, solved by log-linearising around a steady state and the variables are then measured in terms of deviations from the steady state. In practice the steady states, e.g. for output, are usually estimated by some statistical procedure such as the Hodrick-Prescott (HP) filter that might not be appropriate. Thirdly, there are arguments that other variables, e.g. interest rates, foreign inflation and foreign output gaps should enter the Phillips curve. This paper examines these three issues and argues that all three benefit from a global perspective. The global perspective provides additional instruments to alleviate the weak instrument problem, yields a theoretically consistent measure of the steady state and provides a natural route for foreign inflation or output gap to enter the NKPC.

Keywords: Global VAR (GVAR); identification; New Keynesian Phillips Curve; trend-cycle decomposition (search for similar items in EconPapers)
JEL-codes: C32 E17 F37 F42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
Date: 2008-01
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Published in: Journal of Money, Credit and Banking, 2009, 41 (7), 1481-1502

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Journal Article: Identification of New Keynesian Phillips Curves from a Global Perspective (2009) Downloads
Working Paper: Identification of New Keynesian Phillips Curves from a Global Perspective (2008) Downloads
Working Paper: Identification of New Keynesian Phillips Curves from a Global Perspective (2008) Downloads
Working Paper: Identification of new Keynesian Phillips Curves from a global perspective (2008) Downloads
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