Estimating Phillips curves in turbulent times using the ECB's survey of professional forecasters

Luca Onorante and Gary Koop

No 1422, Working Paper Series from European Central Bank

Abstract: This paper uses forecasts from the European Central Bank’s Survey of Professional Forecasters to investigate the relationship between inflation and inflation expectations in the euro area. We use theoretical structures based on the New Keynesian and Neoclassical Phillips curves to inform our empirical work and dynamic model averaging in order to ensure an econometric specification capturing potential changes. We use both regression-based and VAR-based methods. The paper confirms that there have been shifts in the Phillips curve and identifies three sub-periods in the EMU: an initial period of price stability, a few years where inflation was driven mainly by external shocks, and the financial crisis, where the New Keynesian Phillips curve outperforms alternative formulations. This finding underlines the importance of introducing informed judgment in forecasting models and is also important for the conduct of monetary policy, as the crisis entails changes in the effect of expectations on inflation and a resurgence of the “sacrifice ratio”. JEL Classification: E31, C53, C11

Keywords: Bayesian; financial crisis; inflation expectations; Phillips curve; Survey of Professional Forecasters (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-eec, nep-for, nep-mac and nep-mon
Note: 412615
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Related works:
Working Paper: Estimating Phillips Curves in Turbulent Times using the ECBs Survey of Professional Forecasters* (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20121422

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