How to disappear completely: non-linearity and endogeneity in the new keynesian wage Phillips curve

Sebastião Abreu, Daniel and Silva Lopes, Artur (2019): How to disappear completely: non-linearity and endogeneity in the new keynesian wage Phillips curve.

Abstract

We use a three-regime threshold regression model to assess the ability of the New Keynesian Wage Phillips Curve (NKWPC) to describe wage inflation in the U.S. over the 1965-2018 period. Non-linearity is clearly supported by the data and it easily resists an endogeneity correction. However, this correction exposes more clearly the shortcomings of the NKWPC as a successful description of wage dynamics in the extreme phases of the business cycles, when unemployment is either low or high. In both cases it becomes completely flat.

• Item Type: MPRA Paper
• Language: English
• Keywords: Phillips curve; wage rigidity; threshold regression; endogeneity
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles

References

Albuquerque, P. and Baumann, U. (2017), Will US inflation awake from the dead? The role of slack and non-linearities in the Phillips curve, Journal of Policy Modelling, 39, 247-71.

Byrne, D. and Zetaike, Z. (2019), Missing wage growth in the euro area: is the wage Phillips curve non-linear? Central Bank of Ireland working paper.

Donayre, L. and Panovska, I. (2016), Nonlinearities in the U.S. Wage Phillips Curve, Journal of Macroeconomics, 48, 19-43.

Galí, J. (2011), The return of the wage Phillips curve, Journal of the European Economic Association, 9(3), 436-61.

Galí, J. and Gambetti, L. (2019), Has the U.S. Phillips curve flattened? A semi- structural exploration, NBER Working Paper 25476.

Gonzalo, J. and Pitarakis, J.-Y. (2002), Estimation and model selection based inference in single and multiple threshold models, Journal of Econometrics, 110, 319-352.

Hansen, B. E. (1999), Testing for linearity, Journal of Economic Surveys, 13 (5), 551-76.

Hansen, B. E. (2000), Sample splitting and threshold estimation, Econometrica, 68 (3), 575-603.

Kourtellos, A., Stengos, T. and Tan, C. M. (2016), Structural threshold regression, Econometric Theory, 32, 827-60.

McLeay, M. and Tenreyro, S. (2018), Optimal inflation and the identification of the Phillips curve, working paper.

Olea, J. L. M. and Pfluger, C. (2013), A robust test for weak instruments, Journal of Business and Economic Statistics, 31, 358-69.

Phillips, A. W. (1958), The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957, Economica, 25(100), 283-99.

Stock, J. and Watson, M. (2018), Slack and cyclically sensitive inflation, working paper.