The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation

24 Pages Posted: 14 Jul 2022

See all articles by G. S. Tavlas

G. S. Tavlas

Bank of Greece

P.A.V.B. Swamy

Bureau of Labor Statistics

Date Written: March 1, 2006

Abstract

A theoretical analysis of the new Keynesian Phillips curve (NKPC) is provided, formulating the conditions under which the NKPC coincides with a real-world relation that is not spurious or misspecified. A time-varying-coefficient (TVC) model, involving only observed variables, is shown to exactly represent the underlying “true” NKPC under certain conditions. In contrast, “hybrid” NKPC models, which add lagged-inflation and supply-shock variables, are shown to be spurious and misspecified. We also show how to empirically implement the NKPC under the assumption that expectations are formed rationally.

Keywords: Time-varying-coefficient model, Inflation-unemployment trade-off, “Objective” probability, Spurious correlation, Rational expectation, Coefficient driver

JEL Classification: C51, E31, E42, E50

Suggested Citation

Tavlas, George and Swamy, Paravastu A.V.B., The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation (March 1, 2006). Bank of Greece Working Paper No. 34, Available at SSRN: https://ssrn.com/abstract=4162388 or http://dx.doi.org/10.2139/ssrn.4162388

George Tavlas (Contact Author)

Bank of Greece ( email )

21 E. Venizelos Avenue
GR-10250 Athens
Greece
+30 10 323 7224 (Phone)
+30 10 323 3025 (Fax)

Paravastu A.V.B. Swamy

Bureau of Labor Statistics

2 Massachusetts Avenue, NE
Washington, DC 20212
United States

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