Monetary policy shifts and inflation dynamics

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 10 January 2008

Working Paper No. 338
By Paolo Surico

The New Keynesian Phillips Curve plays a central role in modern macroeconomic theory. A vast empirical literature has estimated this structural relationship over various post-war full samples. While it is well known that in a standard sticky price model a 'weak' central bank response to inflation generates sunspot fluctuations, the consequences of pooling observations from different monetary policy regimes for (i) the estimates of the structural Phillips curve and (ii) the estimates of inflation persistence had not been investigated. Using Monte Carlo simulations from a purely forward-looking model, this paper shows that indeterminacy can introduce a sizable persistence in the process of inflation. On the reduced form, our results show that inflation persistence can be endogenous to the policy regime rather than intrinsic to the structure of the economy. On the structural form, we find that by neglecting equilibrium indeterminacy the estimates of the forward-looking term of the New Keynesian Phillips Curve are biased downward. The implications are in line with the empirical evidence for the United Kingdom and United States.

PDFMonetary policy shifts and inflation dynamics

Other papers

Give your feedback

Was this page useful?
Add your details...