Abstract
The canonical New Keynesian Phillips curve specifies inflation as the present-value of future real marginal costs. This paper exploits projections of future real marginal costs generated by VAR models to assess the model’s ability to match the behavior of actual inflation in the Euro area. The model fits the data well at first sight. A set of bias-corrected bootstrapped confidence bands, however, reveals that this result is consistent with both a well fitting and a failing model. These findings also hold for the hybrid version of the Phillips curve.
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I am grateful to two anonymous referees for helpful comments and suggestions. I thank Heinz Herrmann, Mathias Hoffmann, Oliver Holtemöller, and Karl-Heinz Tödter for insightful comments on an earlier draft. This paper was partly written while I was visiting researcher at the Deutsche Bundesbank. I am grateful for the research department’s generous hospitality. Furthermore, I thank seminar participants at the Bundesbank, Dortmund University, the European Commission (DG ECFIN), the first meeting of the DFG network “Quantitative Macroeconomics”, the IWH Macroeconometric Workshop 2006, the University of Mainz, and the EEA conference in Amsterdam for helpful comments. The views expressed in this paper are those of the author and not necessarily those of the Swiss National Bank. All remaining errors are mine.
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Tillmann, P. The New Keynesian Phillips curve in Europe: does it fit or does it fail?. Empir Econ 37, 463–473 (2009). https://doi.org/10.1007/s00181-008-0241-y
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DOI: https://doi.org/10.1007/s00181-008-0241-y