The Hybrid New Keynesian Phillips Curve with Multiple Lags of Inflation
- 1 Department of Economics, Northern Illinois University, DeKalb, IL, USA
Abstract
In deriving the hybrid new Keynesian Phillips curve (HNKPC) in Galí and Gertler (1999) and Holmberg (2006) , i t is assumed that backward-looking firms index their prices to the average prices newly set last period plus last period’s inflation rate, resulting in a Phillips curve equation that relates current inflation to a demand variable, expected future inflation, and last period’s inflation. The present study generalizes the derivation of the HNKPC to allow firms to index prices to multiple lags of inflation, resulting in a HNKPC in which current inflation depends on multiple lags of inflation instead of only one lag of inflation, providing theoretical justification for empirical specifications of the HNKPC that include more than one lag of inflation.
- Akerlof, G. A., Dickens, W. T., Perry, G. L., Gordon, R. J., & Mankiw, N. G. (1996). The Macroeconomics of Low Inflation. Brookings Papers on Economic Activity, 1, 1-76. https://doi.org/10.2307/2534646
- Calvo, G. A. (1983). Staggered Contracts in a Utility-Maximizing Framework. Journal of Monetary Economics, 12, 383-398. https://doi.org/10.1016/0304-3932(83)90060-0
- Christiano, L. J., Eichenbaum, M., & Evans, C. L. (2005). Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy. Journal of Political Economy, 113, 1-45. https://doi.org/10.1086/426038
- Coibion, O., & Gorodnichendo, Y. (2015). Is the Phillips Curve Alive and Well After All? Inflation Expectations and the Missing Disinflation. American Economic Journal: Macroeconomics, 7, 197-232. https://doi.org/10.1257/mac.20130306
- Duca, J. V. (1996). Inflation, Unemployment, and Duration. Economics Letters, 52, 293-298. https://doi.org/10.1016/S0165-1765(96)00853-1
- Fuhrer, J. C. (1995). The Phillips Curve Is Alive and Well. New England Economic Review, March/April 1995, 41-56.
- Fuhrer, J. C. (1997). The (Un)importance of Forward-Looking Behavior in Price Specifications. Journal of Money, Credit, and Banking, 29, 338-350. https://doi.org/10.2307/2953698
- Galí, J., & Gertler, M. (1999). Inflation Dynamics: A Structural Econometric Analysis. Journal of Monetary Economics, 44, 195-222. https://doi.org/10.1016/S0304-3932(99)00023-9
- Gordon, R. J. (1997). The Time-Varying NAIRU and Its Implications for Economic Policy. Journal of Economic Perspectives, 11, 11-32. https://doi.org/10.1257/jep.11.1.11
- Holmberg, K. (2006). Derivation and Estimation of a New Keynesian Phillips Curve in a Small Open Economy. Sveriges Riksbank Working Paper Series #197. https://doi.org/10.2139/ssrn.985902
- King, R. G., & Watson, M. W. (1994). The Post-War U.S. Phillips Curve: A Revisionist Econometric History. Carnegie-Rochester Conference Series on Public Policy, 41, 157-219. https://doi.org/10.1016/0167-2231(94)00018-2
- Mavroeidis, S., Plagborg-Moller, M., & Stock, J. H. (2014). Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve. Journal of Economic Literature, 52, 124-188. https://doi.org/10.1257/jel.52.1.124
- Murphy, R. G. (2014). Explaining Inflation in the Aftermath of the Great Recession. Journal of Macroeconomics, 40, 228-244. https://doi.org/10.1016/j.jmacro.2014.01.002