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Title:Monetary Policy Transmission and the Phillips Curve in a Global Context PDF Logo
Authors:Smith, Ron P.
Pesaran, Mohammad Hashem
Issue Date:2007
Series/Report no.:Kieler Arbeitspapiere 1366
Abstract:The standard derivation of a Phillips curve from a DSGE model requires that all variables are measured as deviations from their steady states. But in practice this is not done. The steady state for output is estimated by some statistical procedure, such as the HP filter, and the steady state for other variables, including inflation, is treated as a constant. This is inconsistent with the theory and raises econometric problems since inflation, for instance, is a very persistent series. We argue that the natural definition of the steady state is the long-horizon forecast and estimate these permanent components from a cointegrating VAR that takes account of global interactions. This estimate of the steady state will reflect any long-run theoretical relationships embodied in the cointegrating vectors. We then estimate Phillips Curves and other standard monetary transmission equations using deviations from the steady states on US data. This is both consistent with the theory and uses the relevant economic information about steady states.
Subjects:Global VAR (GVAR)
Phillips Curve
Monetary Transmisssion
JEL:E17
C32
F42
F37
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des IfW
Kieler Arbeitspapiere, IfW

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