The New Keynesian Phillips Curve : from Sticky Inflation to Sticky Prices

FEMES2006, seminar participants at the Universities of Auckland, Otago and Manchester, for useful comments, with particular thanks to Peter Phillips and Donggyu Sul for their constructive suggestions. All responsibility for errors and omissions lies, however, with the authors. Abstract The New Keynesian Phillips Curve (NKPC) model of inflation dynamics based on forward-looking expectations is of great theoretical significance in monetary policy analysis. dominate the dynamics of the short-run aggregate supply curve. This paper examines this inconsistency by investigating multiple structural changes in the NKPC for the US over 1968-2005. Both inflation expectations survey data and a rational expectations approximation are used to capture expectations. We find that forward-looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing support for the empirical coherence of sticky prices models over the last two decades. A further break in the intercept of the NKPC is identified around 2001 and this may be associated with monetary policy in the recent period. 3 " The theories usually stop short, however, of specifying models of aggregate supply that are intended to hold generally " .