Trend inflation and weak identification in the New Keynesian Phillips curve

Igor Mendes, Edilean Kleber da Silva Bejarano Aragón and Marcelo E.A. Silva

Economics Letters, 2025, vol. 255, issue C

Abstract: In this paper, we estimate a generalized New Keynesian Phillips curve (GNKPC) using monetary shocks as instruments and an approach robust to weak instruments. Compared to the specification that disregards trend inflation, we find that the backward-looking term becomes statistically insignificant, the forward-looking coefficient is higher, and the slope of the Phillips curve is lower. Furthermore, we find evidence suggesting that the GNKPC is weakly identified. These findings highlight the importance of considering trend inflation in the monetary policy decision-making process.

Keywords: New Keynesian Phillips curve; Trend inflation; Weak instruments; Robust inference (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:255:y:2025:i:c:s0165176525003544

DOI: 10.1016/j.econlet.2025.112517

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