TY - JOUR
T1 - The new Keynesian Phillips curve
T2 - An update on recent empirical advances
AU - Abbas, Syed K.
AU - Bhattacharya, Prasad Sankar
AU - Sgro, Pasquale
N1 - Publisher Copyright:
© 2016 Elsevier Inc.
PY - 2016/5/1
Y1 - 2016/5/1
N2 - This paper presents a comprehensive review of the newly emerging literature on the New Keynesian Phillips Curve (NKPC). The theoretical predictions, econometric estimation techniques as well as the corresponding empirical evidence are discussed focusing on both the closed economy and the open economy versions of the NKPC. A number of important findings are reported about the ability of NKPC to explain the process of inflation dynamics. First, there is weak support for the open economy version of the NKPC to be able to track inflation dynamics if imported inputs are used in the production process. Second, the NKPC describes inflation dynamics across sectors if microeconomic and sectoral level data are used. Further, the survey data employed as a proxy for inflation measure in the newer studies provide enhanced support to the closed economy NKPC with the sign, size and statistical significance of coefficients in line with the theoretical predictions. We provide fresh empirical evidence to check the first finding from the review. The deep structural parameters for four different versions of the NKPC, the pure forward looking NKPC, the Gali and Monacelli's (2005) NKPC, the open economy NKPC and the open economy hybrid NKPC, are estimated for Australia, Canada, New Zealand and the United Kingdom. These estimated coefficients show some support that the specifications of open economy NKPC, which incorporate prices of imported goods as opposed to the terms of trade and real exchange rate, seems to be a better, however, weak indicator of the inflation dynamics. These findings may have important policy implications.
AB - This paper presents a comprehensive review of the newly emerging literature on the New Keynesian Phillips Curve (NKPC). The theoretical predictions, econometric estimation techniques as well as the corresponding empirical evidence are discussed focusing on both the closed economy and the open economy versions of the NKPC. A number of important findings are reported about the ability of NKPC to explain the process of inflation dynamics. First, there is weak support for the open economy version of the NKPC to be able to track inflation dynamics if imported inputs are used in the production process. Second, the NKPC describes inflation dynamics across sectors if microeconomic and sectoral level data are used. Further, the survey data employed as a proxy for inflation measure in the newer studies provide enhanced support to the closed economy NKPC with the sign, size and statistical significance of coefficients in line with the theoretical predictions. We provide fresh empirical evidence to check the first finding from the review. The deep structural parameters for four different versions of the NKPC, the pure forward looking NKPC, the Gali and Monacelli's (2005) NKPC, the open economy NKPC and the open economy hybrid NKPC, are estimated for Australia, Canada, New Zealand and the United Kingdom. These estimated coefficients show some support that the specifications of open economy NKPC, which incorporate prices of imported goods as opposed to the terms of trade and real exchange rate, seems to be a better, however, weak indicator of the inflation dynamics. These findings may have important policy implications.
KW - Globalization
KW - Inflation dynamics
KW - New Keynesian Phillips curve
KW - Phillips curve
KW - Price stickiness
UR - http://www.scopus.com/inward/record.url?scp=84961845495&partnerID=8YFLogxK
U2 - 10.1016/j.iref.2016.01.003
DO - 10.1016/j.iref.2016.01.003
M3 - Article
AN - SCOPUS:84961845495
SN - 1059-0560
VL - 43
SP - 378
EP - 403
JO - International Review of Economics and Finance
JF - International Review of Economics and Finance
ER -