The New-Keynesian Phillips curve is usually reported to fit the data better when lagged inflation, and therefore backward-looking price setting, is included in the equation. We argue that the same inflation persistence can be generated by letting the shocks in the economy be highly correlated in a model where price setting is purely forward-looking. Previous estimates in the literature are bias...

Estimating the micro-founded New Keynesian Phillips Curve using rational inflation expectation proxies has often found that the output gap is not a valid measure of inflation pressure. This paper investigates the empirical success of the NKPC in explaining US inflation, using observed measures of inflation expectations and taking account of serial correlation in the stylized NKPC. Contrary to r...

I n most industrialized economies, periods of above average inflation tend to be associated with above average economic activity, for example, as measured by a relatively low unemployment rate. This statistical relationship, known as the Phillips curve, is sometimes invoked when economic commentators suggest that monetary policy should not try to suppress signs of inflation. But this interpreta...

T he theoretical framework within which optimal monetary policy was studied before the arrival of the New Keynesian Phillips curve (NKPC), but after economists had become comfortable using dynamic, optimizing, general equilibrium models and a welfare-maximizing criterion for policy analysis, was one in which the central source of nominal nonneutrality was a demand for money. At center stage in ...

We propose a way to test the New Keynesian Phillips Curve (NKPC) without estimating the structural parameters governing the curve, i.e. price stickiness and firms’ backwardness. Using this strategy we can test the NKPC avoiding the identification problems related to the GMM approach. We find that it does not exist a combination of the structural parameters which is consistent with US data. This...

The paper extends Woodford’s [Optimizing models with nominal rigidities, Chapter 3 of Interest and prices: foundations of a theory of monetary policy, Princeton University, 2000; unpublished manuscript] analysis of the closed economy Phillips curve to an open economy with both commodity trade and capital mobility. We show that consumption smoothing, which comes with the opening of the capital m...

This paper proposes an econometric evaluation of the New Keynesian Phillips Curve (NKPC) in the euro area, under a particular specification of the adaptive learning hypothesis. The key assumption is that agents’ perceived law of motion is a Vector Autoregressive (VAR) model, whose coefficients are updated by maximum likelihood estimation as the information set increases over time. Each time new...