Testing for a Forward-Looking Phillips Curve. Additional Evidence from European and US data

Eric Jondeau and Hervé Le Bihan

Macroeconomics from University Library of Munich, Germany

Abstract: The "New Keynesian" Phillips Curve (NKPC) states that inflation has a purely forward-looking dynamics. In this paper, we test whether European and US inflation dynamics can be described by this model. For this purpose, we estimate hybrid Phillips curves, which include both backward and forward-looking components, for major European countries, the euro area, and the US. Estimation is performed using the GMM technique as well as the ML approach. We examine the sensitivity of the results to the choice of output gap or marginal cost as the driving variable, and test the stability of the obtained specifications. Our findings can be summarized as follows. First, in all countries, the NKPC has to be augmented by additional lags and leads of inflation, in contrast to the prediction of the core model. Second, the fraction of backward-looking price setters is large (in most cases, more than 50 percent), suggesting only limited differences between the US and the euro area. Finally, our preferred specification includes marginal cost in the case of the US and the UK, and output gap in the euro area.

Keywords: Forward-looking Phillips curve; euro area; GMM estimator; ML estimator. (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2001-11-27
New Economics Papers: this item is included in nep-eec
Note: Type of Document - ; prepared on ; to print on ; pages: 40 ; figures: included/request from author/draw your own.
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Citations: View citations in EconPapers (33)

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Working Paper: Testing for a Forward-Looking Phillips Curve. Additional Evidence from European and US Data (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0111005

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