Testing the New Keynesian Phillips curve through Vector Autoregressive models: Results from the Euro area

Fanelli, Luca (2005): Testing the New Keynesian Phillips curve through Vector Autoregressive models: Results from the Euro area.

Abstract

This paper addresses the issue of testing the 'hybrid' New Keynesian Phillips Curve (NKPC) through Vector Autoregressive (VAR) systems and likelihood methods, giving special emphasis to the case where the variables are non-stationary. The idea is to use a VAR for both the inflation rate and the explanatory variable(s) to approximate the dynamics of the system and derive testable restrictions. Attention is focused on the 'inexact' formulation of the NKPC. Empirical results over the period 1971-1998 show that the NKPC is far from being a `good first approximation' of inflation dynamics in the Euro area.

• Item Type: MPRA Paper
• Institution: Department of Statistics, University of Bologna
• Language: English
• Keywords: Inflation dynamics; Forecast model; New Keynesian Phillips Curve; Forward-looking behavior; VAR expectations
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection

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