The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?
George Hondroyiannis (),
P.A.V.B. Swamy and
George Tavlas ()
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P.A.V.B. Swamy: US Bureau of Labour Statistics
No 57, Working Papers from Bank of Greece
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 paper 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 allows us to directly confront specification biases and spurious relationships. Using three 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.
Keywords: New Keynesian Phillips curve; time-varying coefficients; spurious relationships. (search for similar items in EconPapers)
JEL-codes: C51 E31 (search for similar items in EconPapers)
Pages: 28 pages
New Economics Papers: this item is included in nep-cba and nep-mac
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Journal Article: The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation? (2009)
Working Paper: The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation? (2008)
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