Fanelli, Luca (2007): Evaluating the New Keynesian Phillips Curve under VARbased learning.

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Abstract
This paper proposes the evaluation of the New Keynesian Phillips Curve (NKPC) under a new learning mechanism where VAR learning dynamics is combined with the idea of testing the validity of the forwardlooking model of inflation dynamics. The key assumption is that agents’ perceived law of motion is a VAR whose parameters are updated by recursive least squares. Differently from standard adaptive learning methods, agents test sequentially the crossequation restrictions that the NKPC imposes on the VAR as the information set increases. When the restrictions are not rejected agents learn under the restricted system and exploit the crossequation restrictions to forecast inflation. It is thus possible to check how much and in which periods agents’ beliefs are consistent with the restrictions of the theory. The empirical analysis on quarterly data on the euro area shows that the NKPC with negligible backwardlooking parameter is not rejected when the model is evaluated over the period 19842005 under the proposed learning mechanism. The result, however, is not fully robust to specifications based on non stationary variables and points out that learning may represent a remarkable source of euro area inflation persistence but not its only determinant.
Item Type:  MPRA Paper 

Institution:  Department of Statistics, University of Bologna 
Original Title:  Evaluating the New Keynesian Phillips Curve under VARbased learning 
Language:  English 
Keywords:  Adaptive learning; Crossequation restrictions; Forwardlooking model of inflation dynamics; Perceived Law of Motion; Recursive Least Squares; VAR 
Subjects:  C  Mathematical and Quantitative Methods > C3  Multiple or Simultaneous Equation Models ; Multiple Variables > C32  TimeSeries Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C52  Model Evaluation, Validation, and Selection E  Macroeconomics and Monetary Economics > E1  General Aggregative Models > E10  General D  Microeconomics > D8  Information, Knowledge, and Uncertainty > D83  Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness 
Item ID:  1616 
Depositing User:  Luca Fanelli 
Date Deposited:  31. Jan 2007 
Last Modified:  19. May 2015 14:04 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/1616 