Issues in Estimating New Keynesian Phillips Curves in the Presence of Unknown Structural Change

Mariano Kulish and Adrian Pagan

Econometric Reviews, 2016, vol. 35, issue 7, 1251-1270

Abstract: Many articles which have estimated models with forward looking expectations have reported that the magnitude of the coefficients of the expectations term is very large when compared with the effects coming from past dynamics. This has sometimes been regarded as implausible and led to the feeling that the expectations coefficient is biased upwards. A relatively general argument that has been advanced is that the bias could be due to structural changes in the means of the variables entering the structural equation. An alternative explanation is that the bias comes from weak instruments. In this article, we investigate the issue of upward bias in the estimated coefficients of the expectations variable based on a model where we can see what causes the breaks and how to control for them. We conclude that weak instruments are the most likely cause of any bias and note that structural change can affect the quality of instruments. We also look at some empirical work in Castle et al. (2014) on the new Kaynesian Phillips curve (NYPC) in the Euro Area and U.S. assessing whether the smaller coefficient on expectations that Castle et al. (2014) highlight is due to structural change. Our conclusion is that it is not. Instead it comes from their addition of variables to the NKPC. After allowing for the fact that there are weak instruments in the estimated re-specified model, it would seem that the forward coefficient estimate is actually quite high rather than low.

Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/07474938.2014.977075 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Issues in Estimating New Keynesian Phillips Curves in the Presence of Unknown Structural Change (2013)
Working Paper: Issues in Estimating New-Keynesian Phillips Curves in the Presence of Unknown Structural Change (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:emetrv:v:35:y:2016:i:7:p:1251-1270

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/LECR20

DOI: 10.1080/07474938.2014.977075

Access Statistics for this article

Econometric Reviews is currently edited by Dr. Essie Maasoumi

More articles in Econometric Reviews from Taylor & Francis Journals
Bibliographic data for series maintained by ().