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Title:The New Keynesian Phillips Curve in Europe: does it fit or does it fail? PDF Logo
Authors:Tillmann, Peter
Issue Date:2005
Series/Report no.:Discussion paper Series 1 / Volkswirtschaftliches Forschungszentrum der Deutschen Bundesbank 2005,04
Abstract:The canonical New Keynesian model specifies inflation as the present-value of future real marginal cost. This paper tests this New Keynesian Phillips Curve and exploits projections of future real marginal cost generated by VAR models to assess the model's ability to match the behavior of actual inflation. In accordance to the literature, the model fits Euro data well at first sight. However, analyses of this kind disregard the considerable degree of uncertainty surrounding VAR forecasts. A set of bias-corrected bootstrapped confidence bands reveals that this result is consistent with both a well fitting and a completely failing model. Allowing for inflation inertia through backward-looking indexation narrows confidence bands around measures of the model's fit but, still, cannot generate sufficiently precise estimates. Hence, we cannot say whether the model fits or fails.
Subjects:New Keynesian Phillips Curve
present-value model
marginal cost
VAR
bootstrap
JEL:E32
E31
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 1: Economic Studies, Deutsche Bundesbank

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