Robustness of the estimates of the hybrid New Keynesian Phillips curve

Abstract

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.

The Small Open-Economy New Keynesian Phillips Curve: Empirical Evidence and Implied Inflation Dynamics

“…Thus, in our sample, including lagged inflation in the NKPC does not solve the problem of insignificant or wrongly signed output gap coefficients often found in the literature. 10 Overall, these cross-checks reassure us that the empirical fit of the SOE NKPC we found was reasonable. We therefore interpret our results as providing evidence in favor of a moderate support of the underlying theory.…”

Interpreting the evidence for New Keynesian models of inflation dynamics

“…3 Neither was it surprising that Rudd and Whelan's conclusions provoked replies. For example Gali et al (2005) claimed that their results were robust to the critique. Other researchers have pointed out that it may be too simple to ask whether it is the wage-share alone that drives in ‡ation.…”

Estimating the New Keynesian Phillips Curve for the UK: evidence from the inflation-indexed bonds market

“…Some studies find that under certain conditions (e.g. when drift in trend inflation is taken into account) a purely forward-looking version of the model fits the data well ( Sbordone 2002;Gali, Gertler, and López-Salido 2005;Cogley and Sbordone 2008). A good historical discussion about the relative importance of forward-looking and backward-looking components of the Phillips curve can be found in Gordon (2011) .…”