The New Keynesian Phillips Curve in the United States and the Euro Area: Aggregation Bias, Stability and Robustness

46 Pages Posted: 30 Dec 2005

See all articles by Bergljot B. Barkbu

Bergljot B. Barkbu

European University Institute

Vincenzo Cassino

Bank of England - Monetary Analysis

Aileen Gosselin-Lotz

University of Geneva - Graduate Institute of International Studies (HEI)

Laura Piscitelli

Bank of England - Monetary Analysis Division

Date Written: December 2005

Abstract

In the recent past, the empirical literature on the New Keynesian Phillips Curve (NKPC) has grown rapidly. The NKPC has been shown to describe satisfactorily the relationship between inflation and marginal cost both for the United States and the euro area. However, little attention has been given so far to the stability and robustness of the parameters in the estimated NKPC. In this paper, we aim to help fill this gap. After estimating hybrid NKPCs on US and euro-area data using the generalised method of moments and having found that our results are broadly in line with previous findings, we subject our estimated NKPCs to a thorough stability analysis. We find that the estimated coefficients for the United States are stable, whereas those for the euro area are considerably less stable. We then investigate the possible reasons for this instability. One explanation, explored using the Andrews' test, is the presence of structural breaks. Another possibility is the presence of an aggregation bias, which we investigate by estimating NKPCs for the three largest euro-area economies: Germany, France and Italy. At this disaggregated level, the fit of the NKPC improves, but the coefficients are still unstable. Furthermore, the disaggregated analysis indicates the presence of structural breaks in the three largest euro-area economies.

JEL Classification: C12, C13, E31.

Suggested Citation

Barkbu, Bergljot B. and Cassino, Vincenzo and Gosselin-Lotz, Aileen and Piscitelli, Laura, The New Keynesian Phillips Curve in the United States and the Euro Area: Aggregation Bias, Stability and Robustness (December 2005). Bank of England Working Paper Series No. 285, Available at SSRN: https://ssrn.com/abstract=872697 or http://dx.doi.org/10.2139/ssrn.872697

Bergljot B. Barkbu

European University Institute ( email )

Badia Fiesolana
Via dei Roccettini 9
I-50016 San Domenico Fiesole, Tuscany 50014
Italy

Vincenzo Cassino

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom
020 7601 5687 (Phone)

Aileen Gosselin-Lotz

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Laura Piscitelli (Contact Author)

Bank of England - Monetary Analysis Division ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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