Is the backward-looking component important in a New Keynesian Phillips curve?

Chang Jin Kim, Yunmi Kim

Research output: Contribution to journalArticlepeer-review

15 Citations (Scopus)

Abstract

New Keynesian Phillips curves (NKPC) have recently been modified to include additional lags of inflation in the specification in order to capture the considerable persistence in postwar U.S. inflation. Furthermore, many researchers have agreed on the existence of structural changes in the persistence of inflation. Continuing with these literatures, we investigate the nature of structural changes in the hybrid NKPC and reconsider the role of the backward-looking component in the NKPC, taking into account the possibility of structural changes in the steady-state inflation rate. Our empirical results show multiple structural breaks in the NKPC in 1974 and 1982. Accounting for these structural changes, the backward-looking component is no longer significant throughout the whole sample period. In other words, the significant role of the backward-looking component in the earlier literature might be spuriously capturing the structural changes in the steady-state inflation rate. Thus, U.S. inflation dynamics are well explained by a pure NKPC if we take into account the possibility of structural changes in the steady-state inflation rate.

Original languageEnglish
Article number5
JournalStudies in Nonlinear Dynamics and Econometrics
Volume12
Issue number3
DOIs
Publication statusPublished - 2008 Sept 16

Bibliographical note

Funding Information:
∗We would like to thank Charles R. Nelson, Eric Zivot, and seminar participants at the University of Washington, Korea University and Western Economic Association meeting, as well as two anonymous referees for their useful comments. Chang-Jin Kim acknowledges support from Korea Research Foundation Grant (KRF-2007-327-B00086) and Bryan C. Cressey Endowment at the University of Washington. Yunmi Kim acknowledges support from the Grover and Creta Ensley Fellowship Endowment at the University of Washington. This paper is based in part on Yunmi Kim’s doctoral dissertation at the University of Washington.

Keywords

  • Hybrid new Keynesian Phillips curve
  • Regime-shifts
  • Steady-state inflation

ASJC Scopus subject areas

  • Analysis
  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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