Testing an alternative price-setting behavior in the new Keynesian Phillips curve: Extrapolative price-setting mechanism

Yoonseok Choi and Sunghyun Kim ()

International Review of Economics & Finance, 2016, vol. 44, issue C, 253-265

Abstract: In this paper, we propose an expanded version of the hybrid NKPC by incorporating the extrapolative price-setting mechanism in the backward-looking part. We assume that when firms set the price at time t, they use information on the price in period t−1 plus a portion of change in prices between t−1 to t−2 (a partial error correction). Under this expanded setting, we explicitly derive both structural and reduced-form NKPCs. The empirical results show that the extrapolative component is strongly significant in explaining inflation dynamics. In addition, the expanded version of the hybrid NKPC exhibits a better empirical performance than the original hybrid NKPC proposed by Galí and Gertler (1999) in terms of various statistical criteria.

Keywords: Extrapolative price-setting; Inflation dynamics; New Keynesian Phillips curve; Forward-looking; Backward-looking (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:44:y:2016:i:c:p:253-265

DOI: 10.1016/j.iref.2016.02.019

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