INFLATION FORECASTS AND THE NEW KEYNESIAN PHILLIPS CURVE
Sophocles N. Brissimis
Bank of Greece and University of Piraeus
Nicholas S. Magginas
National Bank of Greece
ABSTRACT
The ability of the New Keynesian Phillips curve to explain US inflation dynamics when official central bank forecasts (Greenbook forecasts) are used as a proxy for inflation expectations is examined. The New Keynesian Phillips curve is estimated on quarterly data spanning the period 1970Q1-1998Q2 against the alternative of the Hybrid Phillips curve, which allows for a backward-looking component in the price-setting behavior in the economy. The results are compared to those obtained using actual data on future inflation as conventionally employed in empirical work under the assumption of rational expectations. The empirical evidence provides, in contrast to most of the relevant literature, considerable support for the standard forward-looking New Keynesian Phillips curve when inflation expectations are measured using official inflation forecasts. In this case, lagged inflation terms become insignificant in the hybrid specification. The usefulness of real unit labor cost as the preferred proxy for real marginal cost in recent empirical work on the Phillips curve is confirmed by our results.
Keywords: Inflation; Phillips curve; Real marginal cost; Real-time data; GMM estimation
JEL classification: C13; C52; E31; E37; E50; E52
We are grateful to Heather Gibson for helpful comments. The views expressed in this paper are of the authors and do not necessarily reflect those of their respective institutions.
Sophocles N. Brissimis,
Economic Research Department,
Bank of Greece, 21 E. Venizelos Ave.,
102 50 Athens, Greece,
Tel. +30210-320 2388
Fax +30210-320 2432
E-mail: sbrissimis@bankofgreece.gr