The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?

Stephen Hall, George Hondroyiannis, P. A. V. B. Swamy and George Tavlas

Southern Economic Journal, 2009, vol. 76, issue 2, 467-481

Abstract: The New Keynesian Phillips Curve (NKPC) specifies a relationship between inflation and a forcing variable and the current period's expectation of future inflation. Most empirical estimates of the NKPC, typically based on generalized method of moments (GMM) estimation, have found a significant role for lagged inflation, producing a “hybrid” NKPC. Using U.S. quarterly data, this article examines whether the role of lagged inflation in the NKPC might be due to the spurious outcome of specification biases. Like previous investigators, we employ GMM estimation and, like those investigators, we find a significant effect for lagged inflation. We also use time varying coefficient (TVC) estimation, a procedure that produces consistency under a variety of sources of misspecification. Using two separate measures of expected inflation, we find strong support for the view that, under TVC estimation, the coefficient on expected inflation is near unity and that the role of lagged inflation in the NKPC is spurious.

Date: 2009
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https://doi.org/10.4284/sej.2009.76.2.467

Related works:
Working Paper: The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation? (2008)
Working Paper: The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:76:y:2009:i:2:p:467-481

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