Inflation dynamics: forward or backward looking?

Huiqing Li

Review of Keynesian Economics, 2023, vol. 11, issue 1, 31-51

Abstract: This study tests the hybrid New Keynesian Phillips curve using a novel panel dataset of the 50 US states from 1977 to 2018. The results suggest that the hybrid New Keynesian Phillips curve is a robust representation of the evolution of US inflation, and emphasise the role of unit labour cost as a driving variable. Consistent with , we find relatively larger weights for future inflation than for lagged inflation. This finding confirms the theory of forward-looking behaviour. Furthermore, we obtain more evidence of dominant forward-looking behaviour by using principal component-based instruments, finding that using principal components is a good option to overcome weak identifications.

Keywords: hybrid New Keynesian Phillips curve; inflation dynamics; panel data; principal component-based instruments (search for similar items in EconPapers)
JEL-codes: C23 E12 E31 (search for similar items in EconPapers)
Date: 2023
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