Inflation expectations and the structure of the New-Keynesian Phillips Curve

Abstract

We extend the analysis of Ball (2000) on near-rational expectations. We show that near-rational expectations imply nontrivial additional forecast errors and the degree of error depends on the monetary regime. Moreover, this scheme of expectations does not by itself give support to the New Keynesian Phillips Curve but only to the version built on the staggered prices model of Taylor 1980). The standard model of Calvo 1983 is rejected both under rational expectations and under near-rational expectations in the sense of Ball (2000).

Notes

¹ During this period, all the series (excepting output gap) cannot be considered as stationary. We have computed several unit root tests (ADF, Phillips–Perron, Elliott and al.,), and accepted the null of nonstationarity. Thus, most of the series have been transformed in first difference or in growth rate.

² Nevertheless, on average, the differences between the 6-VAR model and the AR process have falled. The problem arises because their SD have declined faster. As a consequence, their very small error difference becomes more precise and appears statistically significant.