Estimating New Keynesian Phillips Curves Using Exact Methods

Lynda Khalaf and Maral Kichian

Staff Working Papers from Bank of Canada

Abstract: The authors use simple new finite-sample methods to test the empirical relevance of the New Keynesian Phillips curve (NKPC) equation. Unlike tests based on the generalized method of moments, the generalized Anderson-Rubin (1949) tests are immune to the presence of weak instruments and allow, by construction, the identification status of a model to be assessed. The authors illustrate their results using Gali and Gertler's (1999) NKPC specifications and data, as well as a survey-based inflation-expectation series from the Federal Reserve Bank of Philadelphia. The test the authors use rejects Gali and Gertler's estimates (conditional on the latters' choice of instruments). Nevertheless, and in contrast with results obtained by Ma (2002), the authors do obtain relatively informative confidence sets. This provides support for NKPC equations and illustrates the usefulness of using exact procedures in estimations based on instrumental variables. The authors' results also reveal that the least well-identified parameter is w; namely, the proportion of firms that do not adjust their prices in period t.

Keywords: Econometric and statistical methods; Inflation and prices (search for similar items in EconPapers)
JEL-codes: C13 C52 E31 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2004
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:04-11

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