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The New Keynesian Phillips Curve: from Sticky Inflation to Sticky Prices

Chengsi Zhang (), Denise Osborn () and Dong Heon Kim ()

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The Univeristy of Manchester

Abstract: The New Keynesian Phillips Curve (NKPC) model of inflation dynamics based on forward-looking expectations is of great theoretical significance in monetary policy analysis. Empirical studies, however, often find that inflation inertia, rather than inflation expectations, dominate the dynamics of the short-run aggregate supply curve. This paper examines this inconsistency by investigating multiple structural changes in the NKPC for the US over 1968-2005. Both inflation expectations survey data and a rational expectations approximation are used to capture expectations. We find that forward-looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing support for the empirical coherence of sticky prices models over the last two decades. A further break in the intercept of the NKPC is identified around 2001 and this may be associated with monetary policy in the recent period.

New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2006
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Journal Article: The New Keynesian Phillips Curve: From Sticky Inflation to Sticky Prices (2008) Downloads
Working Paper: The New Keynesian Phillips Curve: From Sticky Inflation to Sticky Prices (2007) Downloads
Working Paper: The New Keynesian Phillips Curve: from Sticky Inflation to Sticky Prices (2006) Downloads
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