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Trend Inflation and the Nature of Structural Breaks in the New Keynesian Phillips Curve
Author(s) -
KIM CHANGJIN,
MANOPIMOKE PYM,
NELSON CHARLES R.
Publication year - 2014
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12105
Subject(s) - phillips curve , economics , inflation (cosmology) , new keynesian economics , keynesian economics , unit root , output gap , econometrics , persistence (discontinuity) , real interest rate , monetary policy , physics , geotechnical engineering , theoretical physics , engineering
We show that with a unit root in inflation, the new Keynesian Phillips curve (NKPC) implies an unobserved components model with a stochastic trend component and an inflation gap. Our empirical results suggest that with an increase in trend inflation during the Great Inflation, the response of inflation to real economic activity decreases and the persistence of the inflation gap increases due to an increase in the persistence of the unobserved stationary component. These results are in line with the predictions of Cogley and Sbordone ([Cogley, Timothy, 2008]), who show that the coefficients of the NKPC are functions of time‐varying trend inflation.