A Response to Cogley and Sbordone's Comment on 'Closed-Form Estimates of the New Keynesian Phillips Curve with Time-Varying Trend Inflation'

18 Pages Posted: 21 Jun 2011

See all articles by Michelle L. Barnes

Michelle L. Barnes

Federal Reserve Bank of Boston

Fabia Gumbau-Brisa

Credit Suisse AG

Denny Lie

The University of Sydney - School of Economics

Giovanni Olivei

Federal Reserve Bank of Boston

Date Written: June 17, 2011

Abstract

In their 2010 comment (which we refer to as CS10), Cogley and Sbordone argue that: (i ) our estimates are not entirely closed form, and hence are arbitrary; (ii ) we cannot guarantee that our estimates are valid, while their estimates (Cogley and Sbordone 2008, henceforth CS08) always are; and (iii ) the estimates in CS08, in terms of goodness of fit, are just as good as other, much different estimates in our paper. We show in this reply that the exact closed-form estimates are virtually the same as the "quasi" closed-form estimates. Our estimates are consistent with the implicit assumptions underlying the first-stage VAR used to form expectations, while the estimates in CS08 are not. As a result, the estimates in CS08 point towards model misspecification. We also rebut the goodness of fit comparisons in CS10, and provide a more credible exercise that illustrates that our estimates outperform CS08's estimates.

Keywords: closed form, model-consistent expectations, New Keynesian Phillips curve, forward-looking Euler equation, time-varying trend inflation

JEL Classification: E12, E31, E52

Suggested Citation

Barnes, Michelle L. and Gumbau-Brisa, Fabia and Lie, Denny and Olivei, Giovanni, A Response to Cogley and Sbordone's Comment on 'Closed-Form Estimates of the New Keynesian Phillips Curve with Time-Varying Trend Inflation' (June 17, 2011). Available at SSRN: https://ssrn.com/abstract=1866400 or http://dx.doi.org/10.2139/ssrn.1866400

Michelle L. Barnes

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Fabia Gumbau-Brisa (Contact Author)

Credit Suisse AG ( email )

New York City
United States

Denny Lie

The University of Sydney - School of Economics ( email )

Rm 370 Merewether (H04)
Sydney, NSW 2006 2008
Australia

Giovanni Olivei

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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