Research Discussion Papers, Bank of Finland
No 16/2004:
The use of real time information in Phillips curve relationships for the euro area
Maritta Paloviita ()
and David Mayes ()
Abstract: The dynamics of the Phillips Curve in New Keynesian,
Expectations Augmented and Hybrid forms are extremely sensitive to the
choice, timing and restrictions on variables. An important element of the
debate revolves round what information decision-makers took into account at
the time and round what they thought was going to happen in the future. The
original debate was conducted using up to date, revised estimates of the
data as in the most recent official publications. In this paper, however,
we explore how much three aspects of the specification of the information
available at the time affect the performance of the various Phillips curves
and the choice of the most appropriate dynamic structures. First we
consider the performance of forecasts, published at the time, as
representations of expectations. Second, we explore the impact of using
'real time data' in the sense of what were the most recently available
estimates of the then present and past. Finally we review whether it helps
to use the information that was available at the time in the choice of
instruments in the estimation of the relationships rather than the most up
to date estimate of the data series that has been published. Thus different
datasets are required in the instrument set for every time period. We use a
single consistent source for 'real-time' data on the past, estimates of the
present and forecasts, from OECD Economic Outlook and National Accounts. We
set this up as a panel for the euro area countries covering the period
since 1977. Our principal conclusions are (1) that the most important use
of real time information in the estimation of the Phillips curve is in
using forecasts made at the time to represent expectations; (2) real time
data indicate that the balance of expectations formation was more forward
than backward-looking; (3) by contrast using the most recent, revised, data
suggests more backward-looking and less well-determined behaviour.
Keywords: real-time data; Phillips curve; euro area; (follow links to similar papers)
JEL-Codes: E31; (follow links to similar papers)
55 pages, July 18, 2004
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- This paper is published as:
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Paloviita, Maritta and David Mayes, (2005), 'The use of real time information in Phillips curve relationships for the euro area', North American Journal of Economics and Finance, Vol. 16, pages 415-434
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