The new Keynesian Phillips curve: From sticky inflation to sticky prices

Chengsi Zhang, Denise R. Osborn, Dong Heon Kim

    Research output: Contribution to journalArticlepeer-review

    70 Citations (Scopus)

    Abstract

    The New Keynesian Phillips Curve (NKPC) model of inflation dynamics based on forward-looking expectations is of great theoretical significance in monetary policy analysis. Empirical studies, however, often find that backward-looking inflation inertia dominates the dynamics of the short-run aggregate supply curve. This inconsistency is examined by investigating multiple structural changes in the NKPC for the U.S. between 1960 and 2005, employing both inflation expectations survey data and a rational expectations approximation. We find that forward-looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing empirical support for sticky price models over the last two decades. A break in the intercept of the NKPC is also identified around 2001 and this may be associated with U.S. monetary policy in that period.

    Original languageEnglish
    Pages (from-to)667-699
    Number of pages33
    JournalJournal of Money, Credit and Banking
    Volume40
    Issue number4
    DOIs
    Publication statusPublished - 2008 Jun

    Keywords

    • Inflation survey forecasts
    • Monetary policy
    • New Keynesian Phillips Curve
    • Sticky prices
    • Structural breaks

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics

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