Identifying the Phillips Curve from Shifts in Demand

42 Pages Posted: 10 Oct 2018

See all articles by Regis Barnichon

Regis Barnichon

Federal Reserve Bank of San Francisco

Geert Mesters

Universitat Pompeu Fabra

Date Written: September 14, 2018

Abstract

Despite decades of research, the parameters of the Phillips curve (old or new) remain uncertain, because their estimation is fraught with endogeneity issues: confounding from supply shocks, unobserved inflation expectations and an unobserved output gap. In this work, we use sequences of past aggregate demand shocks (notably monetary shocks) as instrumental variables to address these endogeneity issues and obtain consistent Phillips curve estimates. Our approach can be interpreted as a regression in impulse response space, i.e., to a Phillips curve regression where the actual variables are replaced by their impulse responses to aggregate demand shocks. Once instrumented with monetary shocks, the estimated slope of the Phillips curve is twice as large as with standard methods.

Keywords: Phillips curve, instrumental variables, impulse response regression

JEL Classification: C14, C32, E32, E52

Suggested Citation

Barnichon, Regis and Mesters, Geert, Identifying the Phillips Curve from Shifts in Demand (September 14, 2018). Available at SSRN: https://ssrn.com/abstract=3244174 or http://dx.doi.org/10.2139/ssrn.3244174

Regis Barnichon (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Geert Mesters

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

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