Testing the Invariance of Expectations Models of Inflation

David Hendry, Jennifer Castle and Jurgen Doornik

No 510, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: The new-Keynesian Phillips curve (NKPC) includes expected future inflation as a major feedforward variable to explain current inflation. Models of this type are regularly estimated by replacing the expected value by the actual future outcome, then using Instrumental Variables or Generalized Method of Moments methods to estimate the parameters. However, the underlying theory does not allow for various forms of non-stationarity in the data - despite the fact that crises, breaks and regimes shifts are relatively common. We investigate the consequences for NKPC estimation of breaks in data processes using the new technique of impulse-indicator saturation, and apply the resulting methods to salient published studies to check their viablility.

Keywords: New-Keynesian Phillips curve; inflation expectations; structural breaks; impulse-indicator saturation (search for similar items in EconPapers)
JEL-codes: C22 C51 (search for similar items in EconPapers)
Date: 2010-11-01
New Economics Papers: this item is included in nep-cba, nep-ecm and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Testing the Invariance of Expectations Models of Inflation (2010)
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