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Journal of Economic Literature: Vol. 52 No. 1 (March 2014)

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Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve

Article Citation

Mavroeidis, Sophocles, Mikkel Plagborg-Møller, and James H. Stock. 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve." Journal of Economic Literature, 52(1): 124-88.

DOI: 10.1257/jel.52.1.124

Abstract

We review the main identification strategies and empirical evidence on the role of expectations in the New Keynesian Phillips curve, paying particular attention to the issue of weak identification. Our goal is to provide a clear understanding of the role of expectations that integrates across the different papers and specifications in the literature. We discuss the properties of the various limited-information econometric methods used in the literature and provide explanations of why they produce conflicting results. Using a common dataset and a flexible empirical approach, we find that researchers are faced with substantial specification uncertainty, as different combinations of various a priori reasonable specification choices give rise to a vast set of point estimates. Moreover, given a specification, estimation is subject to considerable sampling uncertainty due to weak identification. We highlight the assumptions that seem to matter most for identification and the configuration of point estimates. We conclude that the literature has reached a limit on how much can be learned about the New Keynesian Phillips curve from aggregate macroeconomic time series. New identification approaches and new datasets are needed to reach an empirical consensus.

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Authors

Mavroeidis, Sophocles (U Oxford)
Plagborg-Møller, Mikkel (Harvard U)
Stock, James H. (Harvard U)

JEL Classifications

C51: Model Construction and Estimation
D84: Expectations; Speculations
E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian
E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
E31: Price Level; Inflation; Deflation


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