New Keynesian Phillips Curve with time-varying parameters

Kuo-Hsuan Chin ()
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Kuo-Hsuan Chin: Feng Chia University

Empirical Economics, 2019, vol. 57, issue 6, No 3, 1869-1889

Abstract: Abstract I generalize the New Keynesian Phillips Curve model of Galí and Gertler (J Monet Econ 44:195–222, 1999) to allow for time-varying parameters. The parameter of interest measures the trade-off between inflation and real economic activity, and it is particularly a nonlinear function of three underlying structural parameters: the discount factor, the degree of price rigidity and the strength of backward-looking behavior or information diffusion. The empirical results show that the estimated parameter of output-inflation trade-off is time varying and is larger in high inflation periods. Specifically, the time-variation of the trade-off between inflation and economic activity stems from the degree of price rigidity, which is negatively correlated with inflation. Moreover, the forward-looking price-setting behavior plays a dominant role in explaining inflation dynamics for most part of the sample period.

Keywords: Stability; Time-varying parameter; Generalized method of moments; New Keynesian Phillips Curve (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s00181-018-1536-2

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