Scandinavian Working Papers in Economics
Memorandum,
Oslo University, Department of Economics
No 21/2010: Testing the Invariance of Expectations Models of Inflation
Ragnar Nymoen (), Jennifer L. Castle, Jurgen A. Doornik and David F. Hendry
Additional contact information
Ragnar Nymoen: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Jennifer L. Castle: Magdalen college, Oxford
Jurgen A. Doornik: Nuffield College, Oxford
David F. Hendry: University of Oxford
Abstract: The new-Keynesian Phillips curve (NKPC) includes expected future inflation to explain current inflation. Such models are estimated by replacing the expected value by the future outcome, using InstrumentalVariables or Generalized Method of Momentsmethods. However, the underlying theory does not allow for various non-stationarities–although crises, breaks and regimes shifts are relatively common. We analytically investigate the consequences for NKPC estimation of breaks in data processes, then apply the new technique of impulse-indicator saturation to salient published studies to check their viability. The coefficient of the future value becomes insignificant after modelling breaks.
Keywords: New-Keynesian Phillips curve; Inflation expectations; Structural breaks; Impulse-indicator saturation.
30 pages, November 11, 2010
Full text files
Memo-21-2010.pdf
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