Research Discussion Papers, Bank of Finland
Comparing alternative Phillips curve specifications: European results with survey-based expectations
Abstract: This paper examines inflation dynamics in Europe.
Econometric specification tests with pooled European data are used to
compare the empirical performance of the New Classical, New Keynesian and
Hybrid specifications of the Phillips curve. Instead of imposing any
specific form of expectations formation, di-rect measures, ie Consensus
Economics survey data are used to proxy economic agents’ inflation
expecta-tions. According to the results, the New Classical Phillips curve
has satisfactory statistical properties. Moreover, the purely
forward-looking New Keynesian Phillips curve is clearly outperformed by the
New Classical and Hybrid Phillips curves. We interpret our results as
indicating that the European inflation process is not purely
forward-looking, and inflation cannot instantaneously adjust to changes in
expecta-tions. Consequently, even allowing for possible non-rationality in
expectations, a lagged inflation term enters the New Keynesian Phillips
curve for inflation dynamics in Europe.
Keywords: Phillips curve; expectations; Europe; (follow links to similar papers)
JEL-Codes: C52; E31; (follow links to similar papers)
32 pages, October 11, 2005
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- This paper is forthcoming as:
Paloviita, Maritta, 'Comparing alternative Phillips curve specifications: European results with survey-based expectations', Applied Economics.
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