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Assessment of hybrid Phillips Curve specifications

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  • Chauvet, Marcelle
  • Hur, Joonyoung
  • Kim, Insu

Abstract

Rudd and Whelan (2006) document evidence that the first-difference of inflation negatively depends on its own lag, and highlight that sticky price models emphasizing the role of firms’ forward-looking pricing behavior cannot be reconciled with the stylized fact. We show that the puzzling negative dependence of the first-difference of inflation on its own lag is consistent with the prediction of the hybrid New Keynesian Phillips Curve (NKPC) with lags of inflation, whereas, as it is argued, it is inconsistent with the prediction of both the purely forward-looking NKPC and its hybrid variant with a lag of inflation. Our theoretical results show that the negative dependence appears only when firms’ forward-looking pricing behavior is relatively more important than backward-looking behavior in determining inflation dynamics.

Suggested Citation

  • Chauvet, Marcelle & Hur, Joonyoung & Kim, Insu, 2017. "Assessment of hybrid Phillips Curve specifications," Economics Letters, Elsevier, vol. 156(C), pages 53-57.
    • Handle: RePEc:eee:ecolet:v:156:y:2017:i:c:p:53-57
    DOI: 10.1016/j.econlet.2017.04.018
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    References listed on IDEAS

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    1. Jeremy Rudd & Karl Whelan, 2006. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," American Economic Review, American Economic Association, vol. 96(1), pages 303-320, March.
    2. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    3. Geert Bekaert & Seonghoon Cho & Antonio Moreno, 2010. "New Keynesian Macroeconomics and the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 33-62, February.
    4. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    5. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 127-159.
    6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    7. Fuhrer, Jeffrey C., 2010. "Inflation Persistence," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 9, pages 423-486, Elsevier.
    8. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
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    More about this item

    Keywords

    Inflation; Sticky price; Hybrid Phillips Curve; Forward-looking; Backward-looking indexation; Lags of inflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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