Inflation Dynamics and Subjective Expectations in the United States

40 Pages Posted: 6 Aug 2003

See all articles by Klaus Adam

Klaus Adam

University of Mannheim; European Central Bank (ECB) - Department of Research; Centre for Economic Policy Research (CEPR)

Mario Padula

University "Ca' Foscari" of Venice; CSEF

Multiple version iconThere are 2 versions of this paper

Date Written: June 2003

Abstract

We estimate a forward looking New Keynesian Phillips Curve (NKPC) for the U.S. using data from the Survey of Professional Forecasters as proxy for expected inflation. We obtain significant and plausible estimates for the structural parameters of the NKPC (the discount factor and the share of firms adjusting prices) independent from whether output or unit labor costs are used as a measure of marginal costs. Survey expectations suggest that the usual identification of expectations exploiting orthogonality of forecast errors with respect to output is severely distorted, which explains why the NKPC estimated with survey data performs much better than under the assumption of rational expectations. We also find that lagged inflation enters the price equation significantly, even when controlling for its ability to predict expectations. This suggests a role for lagged inflation beyond that of capturing non-rationalities in expectations. This suggests a role for lagged inflation beyond that of capturing non-rationalities in expectations. When estimating a Phillips curve where lagged inflation enters due to price indexation by non-reoptimizing firms, we find that rejection of the coefficient restrictions depends on the measure of marginal costs used.

Keywords: Inflation, Phillips curve, Subjective Expectations

JEL Classification: E31

Suggested Citation

Adam, Klaus and Padula, Mario, Inflation Dynamics and Subjective Expectations in the United States (June 2003). CSEF University of Salerno Working Paper No. 3/2002; ECB Working Paper No. 222. Available at SSRN: https://ssrn.com/abstract=313140

Klaus Adam (Contact Author)

University of Mannheim ( email )

Department of Economics
L7 ,3-5
Mannheim, 68131
Germany

HOME PAGE: http://adam.vwl.uni-mannheim.de/1528.0.html

European Central Bank (ECB) - Department of Research ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6597 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Mario Padula

University "Ca' Foscari" of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy
+390412349181 (Phone)
+390412349176 (Fax)

CSEF

Via Don Melillo I
Fisciano, Salerno, 84084
Italy

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