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Is the Backward-Looking Component Important in a New Keynesian Phillips Curve?

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  • Kim Chang-Jin

    (Korea University and University of Washington)

  • Kim Yunmi

    (University of Manitoba)

Abstract

New Keynesian Phillips curves (NKPC) have recently been modified to include additional lags of inflation in the specification in order to capture the considerable persistence in postwar U.S. inflation. Furthermore, many researchers have agreed on the existence of structural changes in the persistence of inflation. Continuing with these literatures, we investigate the nature of structural changes in the hybrid NKPC and reconsider the role of the backward-looking component in the NKPC, taking into account the possibility of structural changes in the steady-state inflation rate. Our empirical results show multiple structural breaks in the NKPC in 1974 and 1982. Accounting for these structural changes, the backward-looking component is no longer significant throughout the whole sample period. In other words, the significant role of the backward-looking component in the earlier literature might be spuriously capturing the structural changes in the steady-state inflation rate. Thus, U.S. inflation dynamics are well explained by a pure NKPC if we take into account the possibility of structural changes in the steady-state inflation rate.

Suggested Citation

  • Kim Chang-Jin & Kim Yunmi, 2008. "Is the Backward-Looking Component Important in a New Keynesian Phillips Curve?," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(3), pages 1-20, September.
    • Handle: RePEc:bpj:sndecm:v:12:y:2008:i:3:n:5
    DOI: 10.2202/1558-3708.1515
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    5. Kushal Banik Chowdhury & Nityananda Sarkar, 2017. "Is the Hybrid New Keynesian Phillips Curve Stable? Evidence from Some Emerging Economies," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 15(3), pages 427-449, September.
    6. Gomes, Orlando, 2012. "Thought experimentation and the Phillips curve," Research in Economics, Elsevier, vol. 66(1), pages 45-64.
    7. Zhang, Chengsi, 2011. "Inflation persistence, inflation expectations, and monetary policy in China," Economic Modelling, Elsevier, vol. 28(1-2), pages 622-629, January.
    8. Lee, Dong Jin & Yoon, Jai Hyung, 2016. "The New Keynesian Phillips Curve in multiple quantiles and the asymmetry of monetary policy," Economic Modelling, Elsevier, vol. 55(C), pages 102-114.
    9. Chortareas, Georgios & Magonis, George & Panagiotidis, Theodore, 2012. "The asymmetry of the New Keynesian Phillips Curve in the euro-area," Economics Letters, Elsevier, vol. 114(2), pages 161-163.
    10. Phiri, Andrew, 2015. "Examining asymmetric effects in the South African Philips curve: Evidence from logistic smooth transition regression (LSTR) models," MPRA Paper 64487, University Library of Munich, Germany.
    11. Denise R. Osborn & Marianne Sensier, 2009. "Uk Inflation: Persistence, Seasonality And Monetary Policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 56(1), pages 24-44, February.
    12. Tule, Moses K. & Salisu, Afees A. & Ebuh, Godday U., 2020. "A test for inflation persistence in Nigeria using fractional integration & fractional cointegration techniques," Economic Modelling, Elsevier, vol. 87(C), pages 225-237.
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    14. Wang Xia & Shang Yuhuang & Zheng Tingguo, 2014. "An extensive study on Markov switching models with endogenous regressors," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(4), pages 403-418, September.

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