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Priors and the Slope of the Phillips Curve

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  • Callum J. Jones
  • Mariano Kulish
  • Juan Pablo Nicolini

Abstract

The slope of the Phillips curve in New Keynesian models is difficult to estimate using aggregate data. We show that in a Bayesian estimation, the priors placed on the parameters governing nominal rigidities significantly influence posterior estimates and thus inferences about the importance of nominal rigidities. Conversely, we show that priors play a negligible role in a New Keynesian model estimated using state-level data. An estimation with state-level data exploits a relatively large panel dataset and removes the influence of endogenous monetary policy.

Suggested Citation

  • Callum J. Jones & Mariano Kulish & Juan Pablo Nicolini, 2021. "Priors and the Slope of the Phillips Curve," Working Papers 778, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:90294
    DOI: 10.21034/wp.778
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    References listed on IDEAS

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    1. Terry Fitzgerald & Callum Jones & Mariano Kulish & Juan Pablo Nicolini, 2024. "Is There a Stable Relationship between Unemployment and Future Inflation?," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(4), pages 114-142, October.
    2. Iskrev, Nikolay, 2010. "Local identification in DSGE models," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 189-202, March.
    3. Michael McLeay & Silvana Tenreyro, 2020. "Optimal Inflation and the Identification of the Phillips Curve," NBER Macroeconomics Annual, University of Chicago Press, vol. 34(1), pages 199-255.
    4. Canova, Fabio & Sala, Luca, 2009. "Back to square one: Identification issues in DSGE models," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 431-449, May.
    5. Del Negro, Marco & Schorfheide, Frank, 2008. "Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1191-1208, October.
    6. Ivana Komunjer & Serena Ng, 2011. "Dynamic Identification of Dynamic Stochastic General Equilibrium Models," Econometrica, Econometric Society, vol. 79(6), pages 1995-2032, November.
    7. Peter N. Ireland, 2004. "Technology Shocks in the New Keynesian Model," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 923-936, November.
    8. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-2156, August.
    9. Kulish, Mariano & Morley, James & Robinson, Tim, 2017. "Estimating DSGE models with zero interest rate policy," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 35-49.
    10. 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.
    11. Callum Jones & Virgiliu Midrigan & Thomas Philippon, 2022. "Household Leverage and the Recession," Econometrica, Econometric Society, vol. 90(5), pages 2471-2505, September.
    12. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
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    More about this item

    Keywords

    Slope of the Phillips curve; Priors; State-level data; Bayesian estimation;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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