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Do professional forecasters behave as if they believed in the New Keynesian Phillips Curve for the euro area?

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Abstract

This paper finds that participants in the European Central Bank’s Survey of Professional Forecasters have submitted forecasts that are consistent with a (mostly forward-looking) empirical version of the New Keynesian Phillips Curve for the euro area. The estimation technique takes advantage of the panel nature of the Survey of Professional Forecasters’ dataset to exploit both its time series and cross-section dimensions, and to control for unobservable individual heterogeneity across forecasters. The estimation results suggest that euro-area inflation forecasts have reacted less to unemployment forecasts after the start of the financial crisis but another cost measure (energy inflation) remains significant. This finding is consistent with a flatter Phillips Curve in the euro area after 2007. However, the reasons suggested by the International Monetary Fund for this finding, namely a better anchoring of inflation expectations and increases in structural unemployment do not seem to find support in the survey data. Instead, the expectations for compensation per employee submitted by professional forecasters are consistent with the existence of downward real-wage rigidities in euro-area labour markets.

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Notes

  1. See http://www.ecb.europa.eu/stats/prices/indic/forecast/html/index.en.html for a full description of the survey and a partial list of contributing institutions.

  2. For a microfounded derivation of the NKPC see, for example, Woodford (2003).

  3. These are expectations of headline inflation, as core inflation is not surveyed.

  4. See their Appendix 1 (p. 59) for the mathematical derivation.

  5. Note that a few forecasts fall outside the box and the whiskers.

  6. See New York Times. 2011. The bank run we knew so little about. 2 April, available at http://www.nytimes.com/2011/04/03/business/03gret.html?_r=0.

  7. This measurement-error bias is also called “attenuation” bias (Wooldridge 2010), as the OLS estimates of the parameters of the regressors measured with error are biased towards zero.

  8. Paloviita and Viren (2015) found a slope coefficient that is statistically different from zero for the full sample, which is consistent with the results reported in the last row of Table 3. However, their estimation method (OLS) is likely to produce inconsistent estimates in the presence of endogeneity and measurement errors.

  9. The value of statistically insignificant estimated parameters is set to zero.

  10. The same results are obtained when the minimum participation requirement is formulated for the full sample, i.e. including in both sub-samples only the forecasters that contributed to at least half of the survey rounds in the full sample. The results are available from the author upon request.

  11. For empirical evidence on downward wage rigidities in the euro area, see the results of the euro-area Wage Dynamics Network: http://www.ecb.europa.eu/home/html/researcher_wdn.en.html.

  12. Ireland, Denmark, France, Belgium, United Kingdom, Switzerland, Austria, Germany, Italy, Netherlands, Finland, Norway, Greece, Sweden, United States and Portugal.

  13. The results of the special questionnaire may be retrieved from http://www.ecb.europa.eu/stats/prices/indic/forecast/shared/files/quest_summary.pdf?8063c5fb1c8002823e72f92c1ecbcd98.

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Acknowledgments

I thank Maximo Camacho, Rutger Poldermans, Enrique Sentana, Oreste Tristani, Thomas Westermann, Marcin Zamojski, participants at the 30th European Economic Association Annual Congress (Mannheim, 2015), the 21st International Panel Data Conference (Budapest, 2015), the XVIII Applied Economics Meeting (Alicante, 2015), and three anonymous referees for their helpful comments.

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  1. Departamento de Economía, Facultad de Ciencias de la Empresa, Universidad Politécnica de Cartagena, c/Real 3, 30201, Cartagena, Spain

    Víctor López-Pérez

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Correspondence to Víctor López-Pérez.

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López-Pérez, V. Do professional forecasters behave as if they believed in the New Keynesian Phillips Curve for the euro area?. Empirica 44, 147–174 (2017). https://doi.org/10.1007/s10663-016-9314-x

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