The new Keynesian Phillips curve revisited

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jedc.2010.01.001 Byline: PA[yen]l Boug (a), a'dne Cappelen (a), Anders Rygh Swensen (a)(b) Abstract: Several authors have questioned the evidence claimed by and that a hybrid version of the new Keynesian Phillips curve approximates European and US inflation dynamics quite well. We re-examine the evidence using the vector autoregressive framework and likelihood based methods, paying particular attention to the stationary and nonstationary, and possibly cointegrated, nature of variables involved. Our results show that the exact as well as the inexact form of the hybrid NKPC are clearly at odds with the European data. On the other hand, finding that the inexact hybrid NKPC is a 'good first approximation' to the US inflation dynamics seems less at odds with the data. However, the assumption of the model that the stochastic term forms a sequence of innovations may be problematic as we find indication of autocorrelation in the estimated residuals. The exact form of the hybrid NKPC is firmly rejected by the US data. Author Affiliation: (a) Statistics Norway, Research Department, P.O.B. 8131 Dep., 0033 Oslo, Norway (b) University of Oslo, Department of Mathematics, P.O.B. 1053 Blindern, 0316 Oslo, Norway Article History: Received 8 November 2008; Revised 6 October 2009; Accepted 19 November 2009