Testing for the New Keynesian Phillips Curve.
Additional Evidence from European Data
Eric Jondeau and Hervé Le Bihan*
Economic Modelling, 2005, 22, 521-550.
Abstract
The "New Keynesian" Phillips Curve (NKPC) states that inflation has
a purely forward-looking dynamics. In this paper, we test whether the inflation
dynamics in European countries can be described by this model. For this purpose,
we estimate hybrid Phillips curves, which include both backward and forward-looking
components, for major European countries, the euro area, and the US. Estimation
is performed using the GMM technique as well as the ML approach. We examine
the sensitivity of the results to the choice of output gap or real unit labor
cost (ULC) as the forcing variable, and test the stability of the obtained specifications.
Our findings can be summarized as follows. First, the GMM estimation method
fails to provide relevant estimates of the hybrid Phillips curve. Second, focusing
on ML estimation, we obtain two preferred specifications: The output-gap specification
with three lags and leads yields very low, and often insignificant, degree of
forward-lookingness. The real-ULC specification with a single lag and lead produces
larger and significant forward-looking components. These two models appear to
fit the data quite well in most European countries.
Keywords: Forward-looking Phillips curve, euro area, GMM estimator, ML estimator.
JEL classification: E31.
* Banque de France, Centre de recherche