Title: The New Keynesian Phillips Curve: Lessons From Single-Equation Econometric Estimation
Abstract: (ProQuest: ... denotes formulae omitted.) The last decade has seen a renewed interest in the Phillips curve that might be an odd awakening for a macroeconomic Rip van Winkle from the 1980s or even the 1990s. Wasn't the Phillips curve tradition discredited by the oil prices shocks of the 1970s or by theoretical critiques of Friedman, Phelps, Lucas, and Sargent? It turns out that the New Keynesian Phillips curve (NKPC) is consistent with both the theoretical demands of modern macroeconomics and some key statistical properties of inflation. In fact, the NKPC can take a sufficient number of guises to accommodate a wide range of perspectives on inflation. The NKPC originated in descriptions of price setting by firms that possess market power. For example, Rotemberg (1982) describes how a monopolist sets prices if it faces a cost of adjustment that rises with the scale of the price change. He shows that prices then gradually track a target price and also depend on expected, future price targets. Calvo (1983) instead describes firms that are monopolistic competitors. They change their prices periodically. Knowing that some time may pass before they next set prices, firms anticipate future cost and demand conditions, as well as current ones, in setting their price. Also, the staggering or nonsynchronization of price setting by firms creates an aggregate stickiness: The aggregate price level will react only partially on impact to an economy-wide shock, such as an unexpected change in monetary policy. These theoretical models link prices to a targeted real variable such as a markup on the costs faced by the price-setting firm. Therefore, they also relate the change in prices over time (i.e., the inflation rate) to real variables. So it is natural to label them as Phillips curves. In fact, there are a range of setups called NKPCs that vary depending on (a) the information and price-setting behavior attributed to firms and (b) the measure of costs or demand that firms are assumed to target. Whether a specific version of the NKPC fits inflation data has implications for our understanding of recent macroeconomic history and for the design of good policy. For example, the parameters of the NKPC influence how monetary policy ideally should respond to external shocks. Schmitt-Grohe and Uribe, in this issue, make this connection clear. (King, also in this issue, describes the uses of an older Phillips curve tradition in policymaking.) Yet, putting the NKPC to use for policy analysis requires that it has a good econometric track record in describing actual inflation dynamics. In this article we review this record using single-equation statistical methods that study the NKPCon its own. These methods stand in contrast to approaches that place the NKPC in larger economic models, sometimes referred to as systems methods, which are reviewed by Schorfheide in this issue. A disadvantage of singleequation methods is that they do not make use of everything known about the economy (e.g., the monetary policy regime), so they generally do not provide the greatest statistical precision. Their advantage is that they allow us to be agnostic about the rest of the economy, and so their findings remain valid and will not be affected by misspecification of other parts of a larger macroeconomic model. This article asks the following questions: How can we estimate the NKPC and what do we find when we do so for the United States? Are its parameters stable over time and well-identified? Is there a relation between inflation and real activity? Do we reach similar conclusions about the NKPC regardless of the way in which we measure inflation, forecast future inflation, or model the costs or output gap that inflation tracks? We focus on marginal cost as the real activity variable in the NKPC. We find that the single-equation statistical evidence for this relationship is mixed. Since 1955 there does seem to be a stable NKPC for the United States with positive parameter values as we would expect from economic theory. …
Publication Year: 2008
Publication Date: 2008-10-01
Language: en
Type: article
Access and Citation
Cited By Count: 59
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot