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Languages : en
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Author: Fabià Gumbau-Brisa
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Languages : en
Pages : 17

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Author: Michelle L. Barnes
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Languages : en
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We illustrate the importance of placing model-consistent restrictions on expectations in the estimation of forward-looking Euler equations. In two-stage limited-information settings where first-stage estimates are used to proxy for expectations, parameter estimates can differ substantially, depending on whether these restrictions are imposed or not. This is shown in an application to the New Keynesian Phillips Curve (NKPC), first in a Monte Carlo exercise, and then on actual data. The closed-form (CF) estimates require by construction that expectations of inflation be model-consistent at all points in time, while the difference-equation (DE) estimates impose no model discipline on expectations. Between those two polar extremes there is a wide range of alternative DE specifications based on the same dynamic relationship that explicitly imposes model restrictions on expectations for a finite number of periods. In our application, these last estimates quickly converge to the CF estimates and illustrate that the DE estimates in Cogley and Sbordone (2008) are not robust to imposing modest model requirements on expectations. In particular, our estimates show that the NKPC is not purely forward-looking, and thus that time-varying trend inflation is insufficient to explain inflation persistence. -- closed form ; model-consistent expectations ; New Keynesian Phillips curve ; forward-looking Euler equation ; time-varying trend inflation

Author: Denny Lie
Publisher:
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Languages : en
Pages : 0

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This paper investigates whether the persistence and the time-varying nature of trend inflation can explain the persistence of inflation in Australia -- that is, whether it can explain the apparent need for backward-looking inflation term(s) in the new Keynesian Phillips curve (NKPC) estimated using Australian data. We derive and estimate an extended open-economy NKPC equation, accounting explicitly for time-varying trend inflation. Our preferred, best-fitting estimates based on the closed-form specification with two indexation lags indicate a significant degree of indexation to past inflation. Thus, in contrast to the result for the US economy, our estimates suggest that accounting for time variation in trend inflation in the NKPC cannot explain away the inertia in the Australian inflation data. The estimates suggest that lagged inflation and future expectations of inflation enter the NKPC with almost equal weights. Finally, notwithstanding the previous results, we find a marked decline in the role of the backward-looking inflation terms since the adoption of an inflation-targeting regime by the Reserve Bank in 1993.

Author: Jeff Fuhrer
Publisher: MIT Press
ISBN: 026225820X
Category : Business & Economics
Languages : en
Pages : 517

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Current perspectives on the Phillips curve, a core macroeconomic concept that treats the relationship between inflation and unemployment. In 1958, economist A. W. Phillips published an article describing what he observed to be the inverse relationship between inflation and unemployment; subsequently, the “Phillips curve” became a central concept in macroeconomic analysis and policymaking. But today's Phillips curve is not the same as the original one from fifty years ago; the economy, our understanding of price setting behavior, the determinants of inflation, and the role of monetary policy have evolved significantly since then. In this book, some of the top economists working today reexamine the theoretical and empirical validity of the Phillips curve in its more recent specifications. The contributors consider such questions as what economists have learned about price and wage setting and inflation expectations that would improve the way we use and formulate the Phillips curve, what the Phillips curve approach can teach us about inflation dynamics, and how these lessons can be applied to improving the conduct of monetary policy. Contributors Lawrence Ball, Ben Bernanke, Oliver Blanchard, V. V. Chari, William T. Dickens, Stanley Fischer, Jeff Fuhrer, Jordi Gali, Michael T. Kiley, Robert G. King, Donald L. Kohn, Yolanda K. Kodrzycki, Jane Sneddon Little, Bartisz Mackowiak, N. Gregory Mankiw, Virgiliu Midrigan, Giovanni P. Olivei, Athanasios Orphanides, Adrian R. Pagan, Christopher A. Pissarides, Lucrezia Reichlin, Paul A. Samuelson, Christopher A. Sims, Frank R. Smets, Robert M. Solow, Jürgen Stark, James H. Stock, Lars E. O. Svensson, John B. Taylor, Mark W. Watson

Author: Jordi Galí
Publisher:
ISBN:
Category : Inflation (Finance)
Languages : en
Pages : 32

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Galí and Gertler (1999) developed a hybrid variant of the New Keynesian Phillips curve that relates inflation to real marginal cost, expected future inflation and lagged inflation. GMM estimates of the model suggest that forward looking behavior is dominant: The coefficient on expected future inflation substantially exceeds the coefficient on lagged inflation. While the latter differs significantly from zero, it is quantitatively modest. Several authors have suggested that our results are the product of specification bias or suspect estimation methods. Here we show that these claims are incorrect, and that our results are robust to a variety of estimation procedures, including GMM estimation of the closed form, and nonlinear instrumental variables. Also, as we discuss, many others have obtained very similar results to ours using a systems approach, including FIML techniques. Hence, the conclusions of GG and others regarding the importance of forward looking behavior remain robust.

Author: Jeremy Bay Rudd
Publisher:
ISBN:
Category : Phillips curve
Languages : en
Pages : 44

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Author: Aurelijus Dabusinskas
Publisher:
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Category : Inflation (Finance)
Languages : en
Pages : 36

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Author: Peter J. N. Sinclair
Publisher: Routledge
ISBN: 1135179778
Category : Business & Economics
Languages : en
Pages : 402

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Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.