Phillips curves are central to discussions of inflation dynamics and monetary policy. The hybrid new Keynesian Phillips curve (NKPC) describes how past inflation, expected future inflation, and a measure of real aggregate demand drive the current inflation rate. This paper studies the (potential) weak identification of the NKPC under GMM and traces this syndrome to a lack of persistence in either exogenous variables or shocks. We employ analytic methods to understand the economics of the NKPC identification problem in the canonical three-equation, new Keynesian model. Given U.S., U.K., and Canadian data, we revisit the empirical evidence and construct tests and confidence intervals based on the exact and pivotal Anderson and Rubin (1949) statistic that is robust to weak identification. We also apply the Guggenberger and Smith (2006) LM test to the underlying NKPC pricing parameters. Both tests yield little evidence of forward-looking inflation dynamics.
JEL classification: E31, C32
Key words: Phillips curve, Keynesian, identification, inflation
The authors thank the Social Sciences and Humanities Research Council of Canada and the Bank of Canada Research Fellowship program for support of this research. Smith thanks the Research Department of the Federal Reserve Bank of Atlanta for providing the environment for this research. Richard Luger and Katharine Neiss provided data for Canada and the United Kingdom respectively while Nikolay Gospodinov and Amir Yaron shared their code. Helpful comments were provided by Fabio Canova, Richard Clarida, Jean-Marie Dufour, Roger Farmer, Jon Faust, Jeffrey Fuhrer, Allan Gregory, Eric Leeper, Jesper Lindé, Thomas Lubik, Antonio Moreno, Charles Nelson, Michel Normandin, Athanasios Orphanides, Adrian Pagan, Juan Rubio-Ramírez, Thomas Sargent, Christoph Schleicher, Michael Woodford, Jonathan Wright, Tao Zha, and seminar participants at the Canadian Economics Association meetings, the Federal Reserve Bank of Atlanta, the European Central Bank’s Third Workshop on Forecasting Techniques, Bank of Canada/UBC/SFU Macroeconomics Workshop, Queen’s University, University of Western Ontario Monetary Economics Conference, University of New South Wales, Johns Hopkins University, Vanderbilt University, Duke University, North Carolina State University, the Federal Reserve Board, the Reserve Bank of New Zealand, and the 2005 Econometric Society World Congress. The views expressed here are the authors’ and not necessarily those of the Bank of Canada, the Federal Reserve Bank of Atlanta, the Federal Reserve System, or any of its staff. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to James M. Nason, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8891, , or Gregor W. Smith, Department of Economics, Queen's University, Kingston, Ontario, CANADA K7L 3N6, 613-533-6659, email@example.com.
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