The short-term dynamics of inflation
In this paper, Mendes et al. estimate the Generalized New Keynesian Phillips Curve (GNKPC) while addressing the issue of weak identification, which is a common problem in the estimation of the New Keynesian Phillips Curve (NKPC).
Methodology:
- Instruments: The authors use monetary shocks as instruments to estimate the GNKPC.
- Robust Approach: They employ a robust approach to weak instruments, ensuring the validity of their results regardless of the variance contribution of the shocks.
- Confidence Intervals: The approach allows for the construction of confidence intervals that are robust to weak identification.
Findings:
- Trend Inflation: Not considering trend inflation tends to overestimate the cost of disinflation.
- Expectational Terms: The effects of expectational terms are found to be unstable.
- Parameter Uncertainty: There is considerable uncertainty about the true values of the parameters of the GNKPC, with some confidence intervals being unbounded.
Implications:
The findings have significant implications for monetary policy, suggesting that caution should be exercised in the choices and calibrations of dynamic stochastic general equilibrium (DSGE) models. The results indicate that the traditional NKPC may not be robust, and the GNKPC provides a better framework for understanding inflation dynamics. Finally, the authors highlight the importance of considering trend inflation in the estimation of the Phillips Curve.
Trend inflation and weak identification in the New Keynesian Phillips curve
Authors: Igor Mendes, Edilean Aragón, Marcelo E. A. Silva
From: São Paulo School of Economics, Federal University of Paraíba, Federal University of Pernambuco
The long-term dynamics of inflation
In this paper, Ascari et al. emphasize the role of trend inflation and its impact on the long-run level of output. The authors use a piecewise linear function to model the relationship between long-run output and trend inflation, allowing for different slopes of the long-run Phillips curve depending on whether trend inflation is above or below a certain threshold.
Findings:
- Threshold for Trend Inflation: The estimated threshold for trend inflation is around 4%. Below this threshold, potential output is found to be independent of trend inflation. However, above the 4% threshold, potential output is negatively affected by trend inflation.
- Quantitative Impact: The negative relationship between trend inflation and potential output is substantial. Above the 4% threshold, every 1 percentage point increase in trend inflation is associated with approximately a 1% decrease in potential output per year.
In summary, the paper challenges the traditional view of a vertical long-run Phillips curve by providing empirical and theoretical evidence for a negatively sloped relationship between trend inflation and potential output, particularly when trend inflation exceeds a certain threshold. The findings highlight the potential costs of high and persistent trend inflation in terms of lower long-run output.
The Long-Run Phillips Curve is … a Curve
Authors: Guido Ascari, Paolo Bonomolo, Qazi Haque
From: University of Oxford, De Nederlandsche Bank, University of Adelaide
