Estimating the New Keynesian Phillips Curve Using Expected Inflation from Financial Market Instruments

Abstract

We estimate the New Keynesian Phillips Curve for the USA from 1997 to 2019 using expected inflation from financial instruments. We use a spliced series comprised of the TIPS spread and inflation swaps. Empirical tests find higher coefficients on backward-looking inflation than forward-looking, except for the 2009 – 2015 period of zero lower bound Fed Funds rate target. This supports the hybrid version of the NKPC. We find zero coefficients on marginal costs proxies for the entire period except during the post-zero lower bound period of 2016 – 2019. Results give very little support for the role of real economic variables in the determination of inflation.

Keywords: New Keynesian Phillips Curve, NKPC, expected inflation, inflation

JEL Classification: C22, E31, E37, E44