Trend inflation and the nature of structural breaks in the new keynesian phillips curve

Chang Jin Kim, Pym Manopimoke, Charles R. Nelson

Research output: Contribution to journalArticle

14 Citations (Scopus)

Abstract

We show that with a unit root in inflation, the new Keynesian Phillips curve (NKPC) implies an unobserved components model with a stochastic trend component and an inflation gap. Our empirical results suggest that with an increase in trend inflation during the Great Inflation, the response of inflation to real economic activity decreases and the persistence of the inflation gap increases due to an increase in the persistence of the unobserved stationary component. These results are in line with the predictions of Cogley and Sbordone ([Cogley, Timothy, 2008]), who show that the coefficients of the NKPC are functions of time-varying trend inflation.

Original languageEnglish
Pages (from-to)253-266
Number of pages14
JournalJournal of Money, Credit and Banking
Volume46
Issue number2-3
DOIs
Publication statusPublished - 2014 Jan 1

Keywords

  • Inflation gap
  • Inobserved components model
  • New keynesian phillips curve
  • Structural breaks
  • Trend inflation

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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