Abstract
A theoretical analysis of the new Keynesian Phillips curve (NKPC) is provided, formulating the conditions under which the NKPC coincides with a real-world relation that is not spurious or misspecified. A time-varying-coefficient (TVC) model, involving only observed variables, is shown to exactly represent the underlying “true” NKPC under certain conditions. In contrast, “hybrid” NKPC models, which add lagged-inflation and supply-shock variables, are shown to be spurious and misspecified. We also show how to empirically implement the NKPC under the assumption that expectations are formed rationally.
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We are grateful to C. D. Aliprantis, Harris Dellas and Arnold Zellner for helpful comments. The questions and comments of an anonymous referee were extremely stimulating. The views expressed are the authors’ own and do not constitute policy of their respective institutions.
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Swamy, P.A.V.B., Tavlas, G.S. The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation. Economic Theory 31, 293–306 (2007). https://doi.org/10.1007/s00199-006-0100-z
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DOI: https://doi.org/10.1007/s00199-006-0100-z
Keywords
- Time-varying-coefficient model
- Inflation-unemployment trade-off
- “Objective” probability
- Spurious correlation
- Rational expectation
- Coefficient driver