Addressing the endogeneity of slack in Phillips Curves

Max-Sebastian Dovì, Gerrit Koester and Christiane Nickel

No 2619, Working Paper Series from European Central Bank

Abstract: Endogeneity of the labour market slack in reduced-form Phillips Curves (PCs) is usually addressed either by including proxies for omitted supply shocks, or by using instrumental variables. Using the Kiviet (2020) Kinky Least Squares estimator, we find evidence that supply-shock proxies should not be omitted from PCs, and that many popular instrumental variables seem to be invalid. We estimate a standard backward-looking wage Phillips Curve by Kinky Least Squares and find that unless a large negative correlation between the slack variable and the error term is assumed, the coefficient of the slack variable is significantly negative. JEL Classification: C1, E3

Keywords: instrument-free inference; limited-information inference; Phillips Curves (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-mac
Note: 3015628
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212619

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