Working Paper: NBER ID: w11788
Authors: Jordi Gal; Mark Gertler; J. David López-Salido
Abstract: Galí and Gertler (1999) developed a hybrid variant of the New Keynesian Phillips curve that relates inflation to real marginal cost, expected future inflation and lagged inflation. GMM estimates of the model suggest that forward looking behavior is dominant: The coefficient on expected future inflation substantially exceeds the coefficient on lagged inflation. While the latter differs significantly from zero, it is quantitatively modest. Several authors have suggested that our results are the product of specification bias or suspect estimation methods. Here we show that these claims are incorrect, and that our results are robust to a variety of estimation procedures, including GMM estimation of the closed form, and nonlinear instrumental variables. Also, as we discuss, many others have obtained very similar results to ours using a systems approach, including FIML techniques. Hence, the conclusions of GG and others regarding the importance of forward looking behavior remain robust.
Keywords: New Keynesian Phillips Curve; inflation dynamics; forward-looking behavior
JEL Codes: E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Detrended GDP (E20) | Incorrect inferences about inflation dynamics (E31) |
| Lagged inflation (E31) | Expected future inflation (E31) |
| Expected future inflation (E31) | Inflation dynamics (E31) |
| Lagged inflation (E31) | Inflation dynamics (E31) |
| Real marginal cost (D40) | Inflation dynamics (E31) |
| Forward-looking behavior (D84) | Inflation dynamics (E31) |