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Are New Keynesian Phillips Curved Identified?

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  • Khalaf, Lynda
  • Kichian, Maral

Abstract

In this paper we use optimal-instrument and new finite-sample methods to test the empirical relevance of the New Keynesian Phillips curve (NKPC) equation. Unlike generalized method of moments-based methods, these generalized Anderson-Rubin tests are immune to the presence of weak instruments, and allow, by construction, to assess the identification status of a model. Our results are illustrated using the Gali-Gertler (1999) NKPC specifications and data, as well as a survey-based inflation expectation series from the Philadelphia Fed. Our test rejects the reported Gali-Gertler estimates, conditional on their choice of instruments. Nevertheless, and in contrast to Ma (2002), we do obtain relatively informative confidence sets. This provides support for NKPC equations and illustrates the usefulness of using exact procedures and optimal instruments in IV-based estimations. In particular, our results reveal that firms fix prices in a predominantly backward-looking manner, but that they adjust prices every quarter or so. Furthermore, the outcomes indicate that it is difficult to pin-point the extent of the importance of marginal costs for the inflation process.
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  • Khalaf, Lynda & Kichian, Maral, 2003. "Are New Keynesian Phillips Curved Identified?," Cahiers de recherche 0312, GREEN.
    • Handle: RePEc:lvl:lagrcr:0312
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    File URL: http://www.green.ecn.ulaval.ca/CahiersGREEN2003/03-12.pdf
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    8. Dufour, Jean-Marie & Khalaf, Lynda, 2002. "Simulation based finite and large sample tests in multivariate regressions," Journal of Econometrics, Elsevier, vol. 111(2), pages 303-322, December.
    9. Dufour, Jean-Marie & Jasiak, Joann, 2001. "Finite Sample Limited Information Inference Methods for Structural Equations and Models with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 815-843, August.
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    Cited by:

    1. Paloviita, Maritta, 2008. "Dynamics of inflation expectations in the euro area," Scientific Monographs, Bank of Finland, number 40/2008.
    2. Sophocles Mavroeidis, 2006. "Testing the New Keynesian Phillips Curve Without Assuming Identification," Working Papers 2006-13, Brown University, Department of Economics.
    3. Mazumder, Sandeep, 2010. "The new Keynesian Phillips curve and the cyclicality of marginal cost," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 747-765, September.
    4. repec:zbw:bofism:2008_040 is not listed on IDEAS

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    More about this item

    Keywords

    NKPC; Anderson-Rubin test; Weak Instruments;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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