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The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?
Author(s) -
Hall Stephen G.,
Hondroyiannis George,
Swamy P. A. V. B.,
Tavlas G. S.
Publication year - 2009
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/sej.2009.76.2.467
Subject(s) - spurious relationship , phillips curve , new keynesian economics , inflation (cosmology) , economics , econometrics , generalized method of moments , consistency (knowledge bases) , estimation , keynesian economics , monetary policy , panel data , statistics , mathematics , physics , geometry , management , theoretical physics
The New Keynesian Phillips Curve (NKPC) specifies a relationship between inflation and a forcing variable and the current period's expectation of future inflation. Most empirical estimates of the NKPC, typically based on generalized method of moments (GMM) estimation, have found a significant role for lagged inflation, producing a “hybrid” NKPC. Using U.S. quarterly data, this article examines whether the role of lagged inflation in the NKPC might be due to the spurious outcome of specification biases. Like previous investigators, we employ GMM estimation and, like those investigators, we find a significant effect for lagged inflation. We also use time varying coefficient (TVC) estimation, a procedure that produces consistency under a variety of sources of misspecification. Using two separate measures of expected inflation, we find strong support for the view that, under TVC estimation, the coefficient on expected inflation is near unity and that the role of lagged inflation in the NKPC is spurious.