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The Output Gap, Expected Future Inflation and Inflation Dynamics: Another Look
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Yash P Mehra
Published/Copyright:
December 16, 2004
Abstract
The empirical test of the New Keynesian Phillips curve is often implemented by estimating a hybrid specification that includes both lagged and future inflation and then by examining whether the estimated coefficient on future inflation is significantly larger than the one on lagged inflation. This article presents evidence that supply shocks matter. Results in previous research – the output gap is irrelevant and expected future inflation is the major determinant of inflation – arise if the hybrid specification is estimated omitting supply shocks and/or lagged inflation. With supply shocks included, the output gap is significant and the estimated coefficient on lagged inflation is significantly larger than the one on future inflation. The estimated coefficient on lagged inflation is unity if in the hybrid specification inflation responds also to a change in the output gap. Together these results suggest that expected future inflation is not the major determinant of current inflation.
Published Online: 2004-12-16
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Articles in the same Issue
- Advances Article
- Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero
- Contributions Article
- Aggregate Price Changes and Dispersion: A Comparison of the Equity and Goods and Services Markets
- Dissemination of Technology in Market and Planned Economies
- Interest-Rate Smoothing: Monetary Policy Inertia or Unobserved Variables?
- Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution
- What Does It Take to Explain Procyclical Productivity?
- Endogenous Distribution, Politics, and the Growth-Equity Tradeoff
- Explaining Speculative Expansions
- Tariffs, Entry Regulation and Markups: Country Size Matters
- Schumpeterian Growth, North-South Trade and Wage Rigidity
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- Multiple Equilibria in Heterogeneous Expectations Models
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- Output Composition of the Monetary Policy Transmission Mechanism in Japan
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- Monetary Policy and the Information Content of the Yield Spread
- The Dynamics of Fertility and Growth: Baby Boom, Bust and Bounce-Back
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