Testing for a Forward-Looking Phillips Curve: Additional Evidence from European and US Data

46 Pages Posted: 26 Dec 2010

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute; Swiss Finance Institute

Hervé le Bihan

Banque de France - Centre de Recherche

Multiple version iconThere are 2 versions of this paper

Date Written: December 2001

Abstract

The "New Keynesian" Phillips Curve (NKPC) states that inflation has a purely forward-looking dynamics. In this paper, we test whether European and US inflation dynamics can be described by this model. For this purpose, we estimate hybrid Phillips curves, which include both backward and forward-looking components, for major European countries, the euro area, and the US. Estimation is performed using the GMM technique as well as the ML approach. We examine the sensitivity of the results to the choice of output gap or marginal cost as the driving variable, and test the stability of the obtained specifications. Our findings can be summarized as follows. First, in all countries, the NKPC has to be augmented by additional lags and leads of inflation, in contrast to the prediction of the core model. Second, the fraction of backward-looking price setters is large (in most cases, more than 50 percent), suggesting only limited differences between the US and the euro area. Finally, our preferred specification includes marginal cost in the case of the US and the UK, and output gap in the euro area.

Keywords: Forward-looking Phillips curve, euro area, GMM estimator, ML estimator

JEL Classification: E31

Suggested Citation

Jondeau, Eric and Le Bihan, Herve, Testing for a Forward-Looking Phillips Curve: Additional Evidence from European and US Data (December 2001). Banque de France Working Paper No. 86, Available at SSRN: https://ssrn.com/abstract=1730173 or http://dx.doi.org/10.2139/ssrn.1730173

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

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Swiss Finance Institute ( email )

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Swiss Finance Institute

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Switzerland

Herve Le Bihan

Banque de France - Centre de Recherche ( email )

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France

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