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The New Keynesian Hybrid Phillips Curve: An Assessment of Competing Specifications for the United States

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  • David Dupuis

Abstract

Inflation forecasting is fundamental to monetary policy. In practice, however, economists are faced with competing goals: accuracy and theoretical consistency. Recent work by Fuhrer and Moore (1995), Galí and Gertler (1999), Galí, Gertler, and Lopez-Salido (2001), Sbordone (2002), and Kozicki and Tinsley (2002a, b) suggests that the two objectives need not be mutually exclusive in the context of inflation forecasts. The New Keynesian Phillips curve is theoretically appealing, because its purely forward-looking specification is based on a model of optimal pricing behaviour with rational expectations. This specification, however, does not properly capture observed inflation persistence. The author estimates three structural models of U.S. inflation that incorporate price frictions to justify the presence of lags in the forward-looking New Keynesian Phillips curve. The models, based on Galí and Gertler (1999) and Kozicki and Tinsley (2002a, b), are tested on the basis of forecast performances. The results show that the new Keynesian hybrid Phillips curve with the output gap as an explanatory variable performs marginally better than the two alternative specifications.

Suggested Citation

  • David Dupuis, 2004. "The New Keynesian Hybrid Phillips Curve: An Assessment of Competing Specifications for the United States," Staff Working Papers 04-31, Bank of Canada.
    • Handle: RePEc:bca:bocawp:04-31
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    References listed on IDEAS

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    1. Juan José Echavarría S. & Enrique López E. & Martha Misas A., 2013. "La persistencia estadística de la inflación en Colombia," Investigación Conjunta-Joint Research, in: Laura Inés D'Amato & Enrique López Enciso & María Teresa Ramírez Giraldo (ed.), Dinámica inflacionaria, persistencia y formación de precios y salarios, edition 1, chapter 6, pages 139-182, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    2. Andrea Vaona, 2006. "Merging the Purchasing Power Parity and the Phillips Curve Literatures: Regional Evidence from Italy," Working Papers 33/2006, University of Verona, Department of Economics.
    3. Thorvardur Tjörvi Ólafsson, 2006. "The New Keynesian Phillips Curve: In Search of Improvements and Adaptation to the Open Economy," Economics wp31_tjorvi, Department of Economics, Central bank of Iceland.
    4. Meredith Beechey & Pär Österholm, 2012. "The Rise and Fall of U.S. Inflation Persistence," International Journal of Central Banking, International Journal of Central Banking, vol. 8(3), pages 55-86, September.
    5. Balfoussia, Hiona & Brissimis, Sophocles & Delis, Manthos D, 2011. "The theoretical framework of monetary policy revisited," MPRA Paper 32236, University Library of Munich, Germany.
    6. Masso, Jaan & Staehr, Karsten, 2005. "Inflation dynamics and nominal adjustment in the Baltic States," Research in International Business and Finance, Elsevier, vol. 19(2), pages 281-303, June.
    7. Kalim Hyder & Stephen G. Hall, 2020. "Estimates of the New Keynesian Phillips Curve for Pakistan," Empirical Economics, Springer, vol. 59(2), pages 871-886, August.

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    More about this item

    Keywords

    Inflation and prices; Economic models;

    JEL classification:

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

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