Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve

By Sophocles Mavroeidis, Mikkel Plagborg-Møller, James H. Stock. 2014

353 citations recorded by the source corpus.

We review the main identification strategies and empirical evidence on the role of expectations in the New Keynesian Phillips curve, paying particular attention to the issue of weak identification. Our goal is to provide a clear understanding of the role of expectations that integrates across the different papers and specifications in the literature. We discuss the properties of the various limited-information econometric methods used in the literature and provide explanations of why they produce conflicting results. Using a common dataset and a flexible empirical approach, we find that researchers are faced with substantial specification uncertainty, as different combinations of various a priori reasonable specification choices give rise to a vast set of point estimates. Moreover, given a specification, estimation is subject to considerable sampling uncertainty due to weak identification. We highlight the assumptions that seem to matter most for identification and the configuration of point estimates. We conclude that the literature has reached a limit on how much can be learned about the New Keynesian Phillips curve from aggregate macroeconomic time series. New identification approaches and new datasets are needed to reach an empirical consensus.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/db73f843553881ce21812389ffbf881f2bd39f46

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Citations in the corpus

Business-Cycle Anatomy (2018, neutral): “And finally see the survey by Mavroeidis, Plagborg-Møller, and Stock (2014) and the references therein for empirical performance of the various incarnations of the Phillips curve. strong positive relation between inflation and the output gap) may reflect a monetary policy that has done a good job…”
Optimal Inflation and the Identification of the Phillips Curve (2019, background): “…and recently Bullard (2018) highlight the role of monetary policy on inflation dynamics in simple New Keynesian models with Taylor rules, and Nason and Smith (2008); Mavroeidis, Plagborg-Møller, and Stock (2014); and Krogh (2015) explore Phillips curve identification in detail in similar setups.”
What's Up with the Phillips Curve? (2020, neutral): “…on the bi-variate relationship 1Some recent papers have also explored the behavior of in ation across geographic areas in the United States and across countries (e.g. Fitzgerald and Nicolini, 2014, Mavroeidis et al. 2014, McLeay and Tenreyro 2019, Hooper et al. 2019, and Geerolf, 2019).”
A Model of the Fed's View on Inflation (2017, neutral): “Moreover, the model allows survey data on agents’ expectations on inﬂation to depart from the full-information rational see Mavroeidis et al. (2014) For a review of results using full-information methods to estimate dynamic stochastic general equilibrium (DSGE) models, see An and Schorfheide (2007).”
High Frequency Identification of Monetary Non-Neutrality: The Information Effect (2018, neutral): “Mavroeidis, Plagborg-Moller, and Stock (2014) survey the literature that has estimated Phillips curves and, using a common data set, run a huge number of a priori reasonable specifications that span different choices made in this literature.”
The Slope of the Phillips Curve: Evidence from U.S. States (2020, background): “Mavroeidis, Plagborg-Møller, and Stock (2014) show that reasonable variation in the choice of data series, the specification, and the time period used yield a wide range of estimates for κ roughly centered on a value of zero (i.e., they are equally likely to have the “right” as the “wrong” sign).”
The International Price System (2015, methodology): “Last, the sensitivity of estimates to specification and sample periods is a major concern with this approach, as documented in the analysis of Mavroeidis et al. (2014).”
Conditional Linear Combination Tests for Weakly Identified Models (2016, methodology): “There is considerable evidence that some NKPC parameters are weakly identified: Mavroeidis et al. (2014) review the empirical literature on the role of expectations in the NKPC and find that parameter estimates are extremely sensitive to model specification and, conditional on correct…”
A Behavioral New Keynesian Model (2020, neutral): “What is the impact on today’s inflation? This is the thought experiment analyzed by McKay et al. (2016) with rational agents, which I pursue here with behavioral agents.”