A Search for a Structural Phillips Curve

39 Pages Posted: 5 Apr 2005

See all articles by Argia M. Sbordone

Argia M. Sbordone

Federal Reserve Bank of New York

Timothy Cogley

Leonard N. Stern School of Business - Department of Economics

Date Written: March 2005

Abstract

The foundation of the New Keynesian Phillips curve (NKPC) is a model of price setting with nominal rigidities that implies that the dynamics of inflation are well explained by the evolution of real marginal costs. In this paper, we analyze whether this is a structurally invariant relationship. We first estimate an unrestricted time-series model for inflation, unit labor costs, and other variables, and present evidence that their joint dynamics are well represented by a vector autoregression (VAR) with drifting coefficients and volatilities. We then apply a two-step minimum distance estimator to estimate deep parameters of the NKPC. Given estimates of the unrestricted VAR, we estimate parameters of the NKPC by minimizing a quadratic function of the restrictions that this theoretical model imposes on the reduced form. Our results suggest that it is possible to reconcile a constant-parameter NKPC with the drifting-parameter VAR; therefore, we argue that the price-setting model is structurally invariant.

Keywords: inflation, Phillips curve, time-varying VAR

JEL Classification: E31

Suggested Citation

Sbordone, Argia M. and Cogley, Timothy, A Search for a Structural Phillips Curve (March 2005). Available at SSRN: https://ssrn.com/abstract=699444 or http://dx.doi.org/10.2139/ssrn.699444

Argia M. Sbordone (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Timothy Cogley

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
530-752-1581 (Phone)
530-752-9382 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
141
Abstract Views
1,293
rank
251,461
PlumX Metrics