Traditional Versus New-Keynesian Phillips Curves: Evidence from Output Effects

Abstract

The issue of the backward-looking versus the forward-looking Phillips curve is still an open question in the macroeconomics profession. We identify a crucial difference between the two hypotheses concerning the real output effects of monetary policy shocks. The backward-looking Phillips curve predicts a strict intertemporal trade-off in the case of monetary shocks: a positive short run response of output is followed by a period where output is below the baseline. The resulting cumulative output effect is exactly zero. In contrast, the forward-looking model implies that the cumulative output effect of temporary monetary shocks is positive. The empirical evidence on the cumulated output effects of money are consistent with the forward-looking model.

Keywords: Phillips curve, monetary neutrality, monetary policy

JEL Classification: E31, E32, E40