We find, consistent with the NKPC
, that inflation expectations matter.
originated in descriptions of price setting by firms that possess market power.
One of the pillar of the model-inflation adjustment equation, also known as New Keynesian Phillips Curve (NKPC
) in the literature, has at least two important features; unlike the traditional Phillips curve the NKPC
is forward-looking; and it has been derived from the profit maximising behaviour of the firms in a monopolistically competitive market structure.
We excluded these industries from further analysis, but we did investigate further as to why the NKPC
model fit them so poorly.
This article reviews estimates of NKPC
parameters that have been obtained by fitting fully specified DSGE models to U.
Therefore, in the class of models commonly used for policy analysis before the emergence of the NKPC
, the optimal monetary policy prescribed that the riskless nominal interest rate--the return on federal funds, say--be set at zero at all times.
The coefficients in this NKPC
are interpreted as structural in the sense that they are likely to be independent of monetary policy.
4 based on the parameter range suggested empirical studies for the NKPC
This is had news for the NKPC
as a model of inflation and for monetary policy.
As for related studies on Japan, Muto (2009) stresses that the measurement of real marginal cost plays a crucial role in estimating the NKPC
and shows that the consideration of labor market frictions greatly improves the goodness of its fit to Japan's data, in line with our result that introducing labor market search and matching frictions improves marginal likelihood.
Motivated by this finding, Gali and Gertler modify the NKPC
by replacing the output gap with real marginal cost mc:
Although the NKPC
is appealing from a theoretical standpoint, empirical estimates of the NKPC
have, by and large, not been successful in explaining the stylized facts about the dynamic effects of monetary policy, whereby monetary policy shocks are thought to first have an effect on output, followed by a delayed and gradual effect on inflation (Mankiw 2001; Walsh 2003).