Identification of New Keynesian Phillips Curves from a global perspective

Stephanie Dees; M. Hashem Pesaran; L. Vanessa Smith; Ron P. Smith

doi:10.1111/j.1538-4616.2009.00264.x

Identification of New Keynesian Phillips Curves from a global perspective

Stephanie Dees, M. Hashem Pesaran, L. Vanessa Smith, Ron P. Smith

Economics

Research output: Contribution to journal › Article › peer-review

Abstract

This paper is concerned with the estimation of New Keynesian Phillips Curves (NKPC) and focuses on two issues: the weak instrument problem and the characterization of the steady states. It proposes some solutions from a global perspective. Using a global vector autoregressive (GVAR) model steady states are estimated as long-horizon expectations and valid instruments are constructed from the global variables as weighted averages. The proposed estimation strategy is illustrated using estimates of the NKPC for eight developed industrial countries. The GVAR generates global factors that are valid instruments and help alleviate the weak instrument problem. The steady states also reflect global influences and any long-run theoretical relationships that might prevail within and across countries in the global economy. The GVAR measure of the steady state performed better than the HP measure, and the use of foreign instruments substantially increased the precision of the estimates of the output coefficient.

Original language	English
Pages (from-to)	1481–1502
Number of pages	22
Journal	Journal of Money Credit and Banking
Volume	41
Issue number	7
Early online date	15 Sept 2009
DOIs	https://doi.org/10.1111/j.1538-4616.2009.00264.x
Publication status	Published - Oct 2009

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10.1111/j.1538-4616.2009.00264.x

http://onlinelibrary.wiley.com/doi/10.1111/j.1538-4616.2009.00264.x/abstract

Cite this

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title = "Identification of New Keynesian Phillips Curves from a global perspective",

abstract = "This paper is concerned with the estimation of New Keynesian Phillips Curves (NKPC) and focuses on two issues: the weak instrument problem and the characterization of the steady states. It proposes some solutions from a global perspective. Using a global vector autoregressive (GVAR) model steady states are estimated as long-horizon expectations and valid instruments are constructed from the global variables as weighted averages. The proposed estimation strategy is illustrated using estimates of the NKPC for eight developed industrial countries. The GVAR generates global factors that are valid instruments and help alleviate the weak instrument problem. The steady states also reflect global influences and any long-run theoretical relationships that might prevail within and across countries in the global economy. The GVAR measure of the steady state performed better than the HP measure, and the use of foreign instruments substantially increased the precision of the estimates of the output coefficient.",

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