Is inflation driven by survey-based,VAR-based or myopic expectations? An empirical assessment from US real-time data

The relative importance of survey-based, VAR-based or myopic expectations is evaluated in accounting for US inflation dynamics in a New Keynesian Phillips Curve (NKPC) setting. Our contribution is threefold. First, we estimate the NKPC with both final and real-time vintage data in order to control for large revisions in the real GDP data. Second, we distinguish between two different series for VAR-based inflation forecasts—derived by a recursive or rolling-window method—to account for changes in the conduct and transmission mechanisms of US monetary policy after World War II. Third, joint restrictions are tested in the NKPC to assess whether one of the expectational variables is able, on its own, to capture inflation dynamics. On a statistical basis, we find that there is no clear-cut winner between VAR- and survey-based inflation expectations. Most of our estimated NKPC variants conclude that survey inflation expectations tend to have the largest numerical weight. Nevertheless, the difference between VAR- and survey-based expectations’ estimated coefficients is not statistically significant. Moreover, myopic expectations do not play any significant role in the majority of the estimated NKPC variants.     

Testing the New Keynesian Phillips Curve Through Vector Autoregressive Models: Results from the Euro Area*

This paper addresses the issue of testing the ‘hybrid’ New Keynesian Phillips curve (NKPC) through vector autoregressive (VAR) systems and likelihood methods, giving special emphasis to the case where the variables are non‐stationary. The idea is to use a VAR for both the inflation rate and the explanatory variable(s) to approximate the dynamics of the system and derive testable restrictions. Attention is focused on the ‘inexact’ formulation of the NKPC. Empirical results over the period 1971–98 show that the NKPC is far from providing a ‘good first approximation’ of inflation dynamics in the Euro area.     

Whatever Happened to Goldilocks? The Role of Expectations in Estimates of the NAIRU in the US and the UK*

During the second half of the 1990s the US economy was characterized as the Goldilocks economy: not too hot, nor too cold, but just right. It was argued that this represented a new paradigm, enabling unemployment to remain low without igniting inflationary pressure. We examine the evidence for a change in the relationship between inflation and unemployment for the US and UK using Phillips curve models. The impact of including explicit inflation expectations is also considered. Inflation expectations are found to play an important role, particularly in the US. When expectations are included there is still evidence that the non‐accelerating inflation rate of unemployment (NAIRU) steadily declined during the late 1990s, although this decline in the US NAIRU is not found solely in the 1990s.     

POSTERIOR‐PREDICTIVE EVIDENCE ON US INFLATION USING EXTENDED NEW KEYNESIAN PHILLIPS CURVE MODELS WITH NON‐FILTERED DATA

Changing time series properties of US inflation and economic activity, measured as marginal costs, are modeled within a set of extended New Keynesian Phillips curve (NKPC) models. It is shown that mechanical removal or modeling of simple low‐frequency movements in the data may yield poor predictive results which depend on the model specification used. Basic NKPC models are extended to include structural time series models that describe typical time‐varying patterns in levels and volatilities. Forward‐ and backward‐looking expectation components for inflation are incorporated and their relative importance is evaluated. Survey data on expected inflation are introduced to strengthen the information in the likelihood. Use is made of simulation‐based Bayesian techniques for the empirical analysis. No credible evidence is found on endogeneity and long‐run stability between inflation and marginal costs. Backward‐looking inflation appears stronger than forward‐looking inflation. Levels and volatilities of inflation are estimated more precisely using rich NKPC models. The extended NKPC structures compare favorably with existing basic Bayesian vector autoregressive and stochastic volatility models in terms of fit and prediction. Tails of the complete predictive distributions indicate an increase in the probability of deflation in recent years. Copyright © 2014 John Wiley & Sons, Ltd.     

Identifying the new Keynesian Phillips curve

Phillips curves are central to discussions of inflation dynamics and monetary policy. The hybrid new Keynesian Phillips curve (NKPC) describes how past inflation, expected future inflation, and a measure of real aggregate demand drive the current inflation rate. This paper studies the (potential) weak identification of the NKPC under Generalized Method of Moments and traces this syndrome to a lack of higher‐order dynamics in exogenous variables. We employ analytic methods to understand the economics of the NKPC identification problem in the canonical three‐equation, new Keynesian model. We revisit the empirical evidence for the USA, the UK, and Canada by constructing tests and confidence intervals based on the Anderson and Rubin ( 1949 ) statistic, which is robust to weak identification. We also apply the Guggenberger and Smith ( 2008 ) LM test to the underlying NKPC pricing parameters. Both tests yield little evidence of forward‐looking inflation dynamics. Copyright © 2008 John Wiley & Sons, Ltd.     

Specification of wage determination mechanisms in urban labor markets

Research into wage determination and inflation at the level of the urban labor market has generally followed a Phillips curve adaptive expectations framework. This paper explores the accuracy of such specifications when national and intermarket linkages are ignored, and extends such specifications to incorporate these linkages. The present research also addresses the impact of serial correlation problems and time series aggregation bias on the ability to identify the local wage determination and inflation mechanism. The estimation results for both annual and quarterly specifications indicate that there is virtually no support for a Phillips curve adaptive expectations hypothesis when external linkages are included in the equations. It is demonstrated that specification errors and serial correlation problems are probably responsible for many of the contradictory and inconclusive results obtained in previous studies.     

Beyond monetary credibility: The impact of globalisation on the output-inflation trade-off in euro-area countries

This paper offers a simple theoretical model and some suggestive empirical evidence on the open economy New Keynesian Phillips Curve (NKPC) based on Blanchard's chain-of-production model (1983). It is here argued that, given a vertical input–output structure of production, the final stage comes with considerable price level inertia because of the high share of predetermined prices or, differently put, in the presence of domestic and international fragmentation in production. Econometric evidence confirms that the (hybrid) open economy specification of the NKPC is a better approximation of inflation dynamics in the euro-area than the closed economy specification and that globalisation has increased price stickiness, thereby producing a flattening of the Phillips Curve.     

Measuring output gap nowcast uncertainty

We propose a methodology for gauging the uncertainty in output gap nowcasts across a large number of commonly-deployed vector autoregressive (VAR) specifications for inflation and the output gap. Our approach utilises many output gap measures to construct ensemble nowcasts for inflation using a linear opinion pool. The predictive densities for the latent output gap utilise weights based on the ability of each specification to provide accurate probabilistic forecasts of inflation. In an application based on US real-time data, nowcasting over the out-of-sample evaluation period from 1991q2 to 2010q1, we demonstrate that a system of bivariate VARs produces well-calibrated ensemble densities for inflation, in contrast to univariate autoregressive benchmarks. The implied nowcast densities for the output gap are multimodal and indicate a considerable degree of uncertainty. For example, we assess the probability of a negative output gap at around 45% between 2004 and 2007. Despite the Greenspan policy regime, there still remained a substantial risk that the nowcast for output was below potential in real time. We extend our methodology to include distinct output gap measures, based on alternative filters, and show that, in our application, the nowcast density for the output gap is sensitive to the detrending method.     

对中国通货膨胀的实证研究——从一般到特殊的建模方法

本文采用从一般到特殊的建模方法,利用PcGets软件,实证考察了1994~2009年中国通货膨胀与货币供应、产出缺口、汇率和国际原油价格之间的联系。研究表明,通货膨胀和货币供应之间存在长期稳定的正相关关系,但通货膨胀并不完全是货币现象。除货币供应外,还有其他更多重要变量共同决定通货膨胀的变化。产出缺口与通货膨胀之间存在显著关系,因而不能忽视汇率因素对通货膨胀的影响等。     

Information rigidities and the news-adjusted output gap

A vector-autoregressive model of actual output and expected output obtained from surveys is used to test for information rigidities and to provide a characterisation of output dynamics that accommodates these information structures. News on actual and expected outputs is decomposed to identify innovations understood to have short-lived effects and these are used with the model to derive a ‘news-adjusted output gap׳ measure. The approach is applied to US data over 1970q1–2014q2 and the new gap measure is shown to provide a good leading indicator of inflation.     

Simulation‐based tests of forward‐looking models under VAR learning dynamics

In this paper we propose a simulation‐based technique to investigate the finite sample performance of likelihood ratio (LR) tests for the nonlinear restrictions that arise when a class of forward‐looking (FL) models typically used in monetary policy analysis is evaluated with vector autoregressive (VAR) models. We consider ‘one‐shot’ tests to evaluate the FL model under the rational expectations hypothesis and sequences of tests obtained under the adaptive learning hypothesis. The analysis is based on a comparison between the unrestricted and restricted VAR likelihoods, and the p‐values associated with the LR test statistics are computed by Monte Carlo simulation. We also address the case where the variables of the FL model can be approximated as non‐stationary cointegrated processes. Application to the ‘hybrid’ New Keynesian Phillips Curve (NKPC) in the euro area shows that (i) the forward‐looking component of inflation dynamics is much larger than the backward‐looking component and (ii) the sequence of restrictions implied by the cointegrated NKPC under learning dynamics is not rejected over the monitoring period 1984–2005. Copyright © 2010 John Wiley & Sons, Ltd.     

The (de-)anchoring of inflation expectations: New evidence from the euro area

Well-anchored inflation expectations are a key factor for achieving economic stability. This paper provides new empirical results on the anchoring of long-term inflation expectations in the euro area. In line with earlier evidence, we find that euro area inflation expectations have been anchored until fall 2011. Since then, however, they respond significantly to macroeconomic news. Our results obtained from multiple endogenous break point tests suggest that euro area inflation expectations have remained de-anchored ever since.     

A New Keynesian model with staggered price and wage setting under learning

This paper provides a study of the implications for economic dynamics when the central bank sets its nominal interest rate target in response to variations in wage inflation. I provide results on the existence, uniqueness, and stability under learning of rational expectations equilibrium for alternative specifications of the manner in which monetary policy responds to economic shocks when nominal rigidities are present. Monopolistically competitive producers set prices via staggered price contracts, and households set nominal wages in the same fashion. In this setting, the conditions for determinacy and learnability of rational expectations equilibrium differ from a model where only prices are sticky. I find that when the central bank responds to wage and price inflation and to the output gap, a Taylor principle for wage and price inflation arises that is related to stability under learning dynamics. In other words, a moderate reaction of the interest rate to wage inflation helps to avoid instability under learning and indeterminacy.     

What drives household inflation expectations in South Africa? Demographics and anchoring under inflation targeting

Demographic determinants (i.e., gender, income, education, race, age) of one year ahead inflation expectations in South Africa are explored. Surveys covering the period 2006–2016 are examined via a mix of time and cross-sectional methods. In doing so, we uncover clear behavioural biases in how respondents view the inflation outlook. Education and income tend to be inversely related to inflation expectations. This is consistent with the literature, although we observe significant changes over time that many other surveys are unable to uncover. Inflation expectations also respond to recently observed inflation, but this is likely facilitated by priming in the survey since respondents are given the previous year and five years mean inflation rates. Younger individuals have lower inflation expectations and react significantly to central bank communication, which is a novel variable not included in other studies of this kind. Another demographic characteristic interacting with communication by the South African Reserve Bank is race. Finally, the direction of change in inflation, that is, whether it is rising or falling, also matters. Hence, even if respondents are primed, they appear to be aware of changes in the direction of inflation. This represents an additional novel feature of the study.     

Do global output gaps help forecast domestic inflation? Evidence from Phillips curves for Poland

This study confronts domestic and global views on inflation through the use of the Hybrid New Keynesian Phillips Curve (HNKPC) models estimated for headline and core inflation in Poland. We analyse the roles of the global vs. domestic output gaps in affecting price changes. We ensure that our conclusions are robust by taking into consideration various proxies for inflation expectations, imported inflation, the domestic output gap and the global output gap.Our results suggest that the global demand conditions are statistically insignificant in the majority of the estimated global versions of HNKPC, independently of the measure of them that is considered. In terms of empirical fit, and especially of the out-of-sample forecasting accuracy, the specifications of the Phillips curve with the domestic and global output gaps among the explanatory variables are not superior to traditional Phillips curves. Interestingly, the relative importance of the global output gap is much smaller in models that are estimated in terms of core inflation, excluding foodstuffs and energy, than in CPI inflation models. This suggests that global demand conditions affect the inflation in Poland indirectly, mainly through the prices of food and energy raw materials.The main conclusion from our study is that external factors that are already considered in the traditional hybrid versions of the new Keynesian Phillips curve are sufficient to account for global influences on prices in the domestic economy. The concept of the global output gap improves neither the explanatory nor the predictive power of HNKPC models.     

Inflation dynamics and the New Keynesian Phillips Curve: An identification robust econometric analysis

We use identification-robust methods to assess a New Keynesian Phillips Curve (NKPC) equation. We focus on the Gali – Gertler [1999. Inflation dynamics: a structural econometric analysis. Journal of Monetary Economics 44, 195–222] specification, for U.S. and Canadian data. Two variants of the model are studied: one based on a rational-expectations assumption, and a modification which uses survey-based data on inflation expectations. The two specifications exhibit sharp differences concerning: (i) identification difficulties, (ii) backward-looking behavior, and (iii) price adjustment frequency. Overall, the results provide some support to the hybrid NKPC for the U.S., whereas the model is not suited to Canada. Our analysis underscores the need for employing identification-robust inference methods.     

新凯恩斯菲利普斯曲线的弱识别检验和稳健估计

对基于GMM大样本统计量的检验和估计,弱识别会带来点估计不一致和置信区间规模不正确的问题。本文讨论了弱识别问题产生的原因、影响、检验和相关弱识别稳健统计量。用Cragg-Donald F统计量对NKPC重新进行了检验,发现的确存在弱识别问题,本文进而对NKPC的参数进行了弱识别稳健的估计,并且用CLR统计量构造了相应规模正确的置信区间。实证表明中国的通货膨胀具有明显的向前和向后行为,而向前行为从数量上来说要大于向后行为的影响,但是向后行为在数量上来说也是不可忽视的;子样本的检验表明通涨的向后行为有增强的趋势。     

Asymmetric Taylor reaction functions of the ECB: An approach depending on the state of the economy

We introduce a new approach to estimate asymmetric Taylor reaction functions where asymmetries depend crucially on the state of the economy which is in the Taylor rule framework the combination of inflation and output deviations. Thus we categorize the sample into four subsamples which correspond to all possible combinations concerning inflation and output deviations. Moreover we introduce a quadratic term of inflation and the output gap in the estimation equation for each state in order to capture possible non-linearities within each state. The approach is tested using data for the ECB because the ECB has communicated an explicit inflation target.     

Monetary policy trade-offs in an estimated open-economy DSGE model

This paper studies the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank׳s estimated dynamic stochastic general equilibrium (DSGE) model of a small open economy. Our main finding is that the trade-off between stabilizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible.     

Nonlinearity in the Fed's monetary policy rule

This paper investigates the nature of nonlinearities in the monetary policy rule of the US Federal Reserve (Fed) using the flexible approach to nonlinear inference. We find that while there is significant evidence of nonlinearity for the period to 1979, there is little such evidence for the subsequent period. Possible asymmetries in the Fed's reactions to inflation deviations from target and the output gap in the 1960s and 1970s may tell part of the story, but do not capture the entire nature of the nonlinearity. The inclusion of the interaction between inflation deviations and the output gap, as recently proposed, appears to characterize the nonlinear policy rule more adequately. Copyright © 2005 John Wiley & Sons, Ltd.