The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation |
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Authors: | P A V B Swamy George S Tavlas |
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Institution: | (1) Bureau of Labor Statistics, Postal Square Building, Room # 4985, 2 Massachusetts Avenue, N.E., Washington, DC 20212, USA;(2) Economic Research Department, Bank of Greece, 21 El. Venizelou St., 102 50 Athens, Greece |
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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.
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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Keywords: | Time-varying-coefficient model Inflation-unemployment trade-off “ Objective” probability Spurious correlation Rational expectation Coefficient driver |
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