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Inflation dynamics: forward or backward looking?

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  • Huiqing Li

Abstract

This study tests the hybrid New Keynesian Phillips curve using a novel panel dataset of the 50 US states from 1977 to 2018. The results suggest that the hybrid New Keynesian Phillips curve is a robust representation of the evolution of US inflation, and emphasise the role of unit labour cost as a driving variable. Consistent with , we find relatively larger weights for future inflation than for lagged inflation. This finding confirms the theory of forward-looking behaviour. Furthermore, we obtain more evidence of dominant forward-looking behaviour by using principal component-based instruments, finding that using principal components is a good option to overcome weak identifications.

Suggested Citation

  • Huiqing Li, 2023. "Inflation dynamics: forward or backward looking?," Review of Keynesian Economics, Edward Elgar Publishing, vol. 11(1), pages 31-51, January.
    • Handle: RePEc:elg:rokejn:v:11:y:2023:i:1:p31-51
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    More about this item

    Keywords

    hybrid New Keynesian Phillips curve; inflation dynamics; panel data; principal component-based instruments;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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