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The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation

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  • P. Swamy
  • George Tavlas
Abstract
A theoretical analysis of the new Keynesian Phillips curve (NKPC) is provided, formulating the conditions under which the NKPC coincides with a real-world relation that is not spurious or misspecified. A time-varying-coefficient (TVC) model, involving only observed variables, is shown to exactly represent the underlying “true” NKPC under certain conditions. In contrast, “hybrid” NKPC models, which add lagged-inflation and supply-shock variables, are shown to be spurious and misspecified. We also show how to empirically implement the NKPC under the assumption that expectations are formed rationally.
(This abstract was borrowed from another version of this item.)

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  • P. Swamy & George Tavlas, 2007. "The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(2), pages 293-306, May.
    • Handle: RePEc:spr:joecth:v:31:y:2007:i:2:p:293-306
    DOI: 10.1007/s00199-006-0100-z
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    Cited by:

    1. Stephen Hall & P. Swamy & George Tavlas, 2012. "Generalized cointegration: a new concept with an application to health expenditure and health outcomes," Empirical Economics, Springer, vol. 42(2), pages 603-618, April.
    2. George S. Tavlas, 2009. "The Benefits And Costs Of Monetary Union In Southern Africa: A Critical Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 1-43, February.
    3. Stephen G.Hall & George Hondroyiannis & P.A.V.B. Swamy & George S. Tavlas, 2007. "A Portofolio Balance Approach to Euro-Area Money Demand in a Time-Varying Environment," Working Papers 61, Bank of Greece.
    4. Stephen G. Hall & George Hondroyiannis & P. A. V. B. Swamy & G. S. Tavlas, 2009. "The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?," Southern Economic Journal, John Wiley & Sons, vol. 76(2), pages 467-481, October.
    5. Stephen G. Hall & George Hondroyiannis & P.A.V.B. Swamy & George S. Tavlas, 2009. "Where Has All the Money Gone? Wealth and the Demand for Money in South Africa †," Journal of African Economies, Centre for the Study of African Economies, vol. 18(1), pages 84-112, January.
    6. John Williamson, 2006. "A worldwide system of reference rates," International Economics and Economic Policy, Springer, vol. 3(3), pages 341-352, December.
    7. George Hondroyiannis & P.A.V.B. Swamy & George Tavlas & Michael Ulan, 2008. "Some Further Evidence on Exchange-Rate Volatility and Exports," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(1), pages 151-180, April.
    8. Hondroyiannis, George & Swamy, P.A.V.B. & Tavlas, George S., 2009. "The New Keynesian Phillips Curve In A Time-Varying Coefficient Environment: Some European Evidence," Macroeconomic Dynamics, Cambridge University Press, vol. 13(2), pages 149-166, April.
    9. Hall, Stephen G. & Swamy, P. A. V. B. & Tavlas, George S., 2017. "Time-Varying Coefficient Models: A Proposal For Selecting The Coefficient Driver Sets," Macroeconomic Dynamics, Cambridge University Press, vol. 21(5), pages 1158-1174, July.
    10. Medel, Carlos, 2015. "Inflation Dynamics and the Hybrid Neo Keynesian Phillips Curve: The Case of Chile," MPRA Paper 62609, University Library of Munich, Germany.
    11. Otmar Issing, 2006. "Europe's Hard Fix: The Euro Area," Working Papers 39, Bank of Greece.
    12. Tavlas, George & Dellas, Harris & Stockman, Alan C., 2008. "The classification and performance of alternative exchange-rate systems," European Economic Review, Elsevier, vol. 52(6), pages 941-963, August.
    13. Joseph Aschheim & George S. Tavlas, 2006. "Money as mumeraire: doctrinal aspects and contemporary relevance," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(239), pages 333-361.
    14. Swamy P. A. V. B. & Tavlas George S & Hall Stephen G. F. & Hondroyiannis George, 2010. "Estimation of Parameters in the Presence of Model Misspecification and Measurement Error," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 14(3), pages 1-35, May.
    15. Stephen G. Hall & P. A. V. B. Swamy & George S. Tavlas, 2012. "Milton Friedman, the demand for money, and the ECB’s monetary policy strategy," Review, Federal Reserve Bank of St. Louis, vol. 94(May), pages 153-186.
    16. Hall, Stephen G. & Hondroyiannis, George & Swamy, P.A.V.B. & Tavlas, George S., 2009. "Assessing the causal relationship between euro-area money and prices in a time-varying environment," Economic Modelling, Elsevier, vol. 26(4), pages 760-766, July.
    17. Hans Genberg, 2006. "Exchange-rate arrangements and financial integration in East Asia: on a collision course?," International Economics and Economic Policy, Springer, vol. 3(3), pages 359-377, December.
    18. P.A.V.B. Swamy & George S. Tavlas & Stephen G. Hall, 2015. "On the Interpretation of Instrumental Variables in the Presence of Specification Errors," Econometrics, MDPI, vol. 3(1), pages 1-10, January.
    19. Hall, Stephen G. & Hondroyiannis, George & Kenjegaliev, Amangeldi & Swamy, P.A.V.B. & Tavlas, George S., 2013. "Is the relationship between prices and exchange rates homogeneous?," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 411-438.
    20. Hall, Stephen & Hondroyiannis, George & Swamy, P.A.V.B. & Tavlas, George & Ulan, Michael, 2010. "Exchange-rate volatility and export performance: Do emerging market economies resemble industrial countries or other developing countries?," Economic Modelling, Elsevier, vol. 27(6), pages 1514-1521, November.
    21. Sell, Friedrich L. & Reinisch, David C., 2013. "How do Beveridge and Phillips curves in the euro area behave under the stress of the world economic crisis?," Working Papers in Economics 2013,1, Bundeswehr University Munich, Economic Research Group.
    22. Hondroyiannis, George & Swamy, P.A.V.B. & Tavlas, George S., 2008. "Inflation dynamics in the euro area and in new EU members: Implications for monetary policy," Economic Modelling, Elsevier, vol. 25(6), pages 1116-1127, November.
    23. Alexandros E. Milionis, 2006. "An Alternative Definition of Market Efficiency and some Comments on its Empirical Testing," Working Papers 50, Bank of Greece.
    24. Phornchanok Cumperayot & Casper G. de Vries, 2006. "Large Swings in Currencies driven by Fundamentals," Tinbergen Institute Discussion Papers 06-086/2, Tinbergen Institute.
    25. Petre Caraiani & Emmanuel Haven, 2013. "The Role of Recurrence Plots in Characterizing the Output-Unemployment Relationship: An Analysis," PLOS ONE, Public Library of Science, vol. 8(2), pages 1-11, February.

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    More about this item

    Keywords

    Time-varying-coefficient model; Inflation-unemployment trade-off; “Objective” probability; Spurious correlation; Rational expectation; Coefficient driver; C51; E31; E42; E50;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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