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The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation

George Tavlas () and P.A.V.B. Swamy
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P.A.V.B. Swamy: US Bureau of Labour Statistics

No 34, Working Papers from Bank of Greece

Abstract: A theoretical analysis of the new Keynesian Phillips curve (NKPC) is provided, formulating the conditions under which the NKPC coincides with a real-world relation that is not spurious or misspecified. A time-varying-coefficient (TVC) model, involving only observed variables, is shown to exactly represent the underlying “true” NKPC under certain conditions. In contrast, “hybrid” NKPC models, which add lagged-inflation and supply-shock variables, are shown to be spurious and misspecified. We also show how to empirically implement the NKPC under the assumption that expectations are formed rationally.

Keywords: Time-varying-coefficient model; Inflation-unemployment trade-off; “Objective” probability; Spurious correlation; Rational expectation; Coefficient driver (search for similar items in EconPapers)
JEL-codes: C51 E31 E42 E50 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2006-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (7) Track citations by RSS feed

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Journal Article: The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation (2007) Downloads
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