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Rudd and Whelan (2006) document evidence that the first-difference of inflation negatively depends on its own lag, and highlight that sticky price models emphasizing the role of firms’ forward-looking pricing behavior cannot be reconciled with the stylized fact. We show that the puzzling negative dependence of the first-difference of inflation on its own lag is consistent with the prediction of the hybrid New Keynesian Phillips Curve (NKPC) with lags of inflation, whereas, as it is argued, it is inconsistent with the prediction of both the purely forward-looking NKPC and its hybrid variant with a lag of inflation. Our theoretical results show that the negative dependence appears only when firms’ forward-looking pricing behavior is relatively more important than backward-looking behavior in determining inflation dynamics.

The aim of this paper is to investigate the dynamics of inflation in Brazil between 2000-IV to 2014-II, through the hybrid Phillips Curve approach. This econometric specification allows evaluating the forward looking and backward looking terms. The models were estimated by ARDL method and the results showed that the inclusion of unit labor cost as a proxy for economic activity generated a better fit in the estimation of the Phillips curve. The expectation of inflation has dominance in determining the dynamics of the Brazilian inflation. There is still an inertial component given by the rigidity of prices due to the indexation of several contracts and government managed prices. O objetivo deste artigo é investigar a dinâmica da inflação no Brasil no período entre 2000-IV e 2014-II, por meio da abordagem da Curva de Phillips híbrida. Essa especificação econométrica permite avaliar os termos forward looking ou expectativa de inflação e backward looking inflação defasada. Os modelos foram estimados pelo método ARDL e os resultados mostraram que a inclusão do custo unitário do trabalho como proxy para a atividade econômica gerou um melhor ajustamento na estimação da Curva de Phillips. A expectativa de inflação tem dominância determinação da dinâmica da inflação brasileira. Há ainda um componente inercial dado pela rigidez de preços proveniente da indexação de contratos e preços administrados.

This paper examines the dynamics of expected inflation regimes in Japan over the last three decades based on the smooth transition Phillips curve model. We find that there is a strong connection between the expected inflation and monetary policy regimes. The results also suggest that the introduction of the inflation targeting policy, and quantitative and qualitative easing in the beginning of 2013 have successfully escaped from the deflationary regime, but was not enough to achieve the 2% inflation target. Finally, our results indicate the significance of exchange rates in explaining the recent fluctuations of inflation, and the importance of oil and stock prices in maintaining the positive expected inflation regime.

Empirical estimations of the New Keynesian Phillips curve support hybrid versions with a positive weight on lagged inflation and a weight less than one on expected inflation. We argue that myopic price setting of some agents explains the low weight on expected inflation. The lagged term can be explained by trend extrapolation if information about the future is costly. In a laboratory experiment we implement the Calvo (1983) microfoundations of the Phillips curve. Our hypotheses are supported by the experimental data. About half of the subjects set optimal Calvo prices while about a third is myopic.

O objetivo deste artigo é investigar a dinâmica da inflação no Brasil no período entre 2000-IV e 2014-II, por meio da abordagem da Curva de Phillips híbrida. Essa especificação econométrica permite avaliar os termos forward looking ou expectativa de inflação e backward looking inflação defasada. Os modelos foram estimados pelo método ARDL e os resultados mostraram que a inclusão do custo unitário do trabalho como proxy para a atividade econômica gerou um melhor ajustamento na estimação da Curva de Phillips. A expectativa de inflação tem dominância determinação da dinâmica da inflação brasileira. Há ainda um componente inercial dado pela rigidez de preços proveniente da indexação de contratos e preços administrados.

We experimentally test the price-setting behavior of firms in the Rotemberg (1982) model in order to explain puzzles in the New Keynesian Phillips curve (NKPC). By constructing categories and a quantitative measure that compare behavior with optimum we find heterogeneous price-setting behavior by degree of information acquired about the future. Subjects rarely use past information, but overweight their own past price. We study the impact of heterogeneous price-setting behavior on estimated theoretically derived and hybrid Phillips curves. We find support for features of both NKPCs in our findings at the micro level. But the hybrid NKPC has a superior fit. Dieses Papier untersucht das Preissetzungsverhalten von Firmen im Rotemberg-Modell (1982). Das Model von Rotemberg dient der Mikrofundierung der Neukeynesianischen Phillipskurve. Empirische Schätzungen der Phillipskurve widersprechen den theoretischen Vorhersagen des Rotemberg-Modells und wir nutzen Laborexperimente, um diese Puzzles zu untersuchen. In unseren Laborexperimenten, in denen die Teilnehmer als Firmen Preise setzen, beobachten wir die Informationen, die die Teilnehmer zu ihrer Entscheidungsfindung nutzen. Je nach der Menge der genutzten Informationen finden wir systematisch unterschiedliche Preise. Wir fanden heraus, dass nur wenige Teilnehmer Informationen über die Vergangenheit nutzen, aber dass der eigene gesetzte Preis der vorherigen Periode übergewichtet wird. Schließlich untersuchen wir die Auswirkungen des festgestellten heterogenen Preissetzungsverhaltens auf die Phillipskurve. Unser Ergebnis ist, dass die hybride Phillipskurve einen besseren Fit hat als die theoretisch vorhergesagte Phillipskurve.

Empirical estimations of the New Keynesian Phillips curve support hybrid versions with a positive weight on lagged infl ation and a weight less than one on expected inflation. We argue that myopic price setting of some agents explains the low weight on expected inflation. The lagged term can be explained by trend extrapolation if information about the future is costly. In a laboratory experiment we implement the Calvo (1983) microfoundations of the Phillips curve. Both of our hypotheses are supported by the experimental data. About half of the subjects set optimal Calvo prices while about a third is myopic. Empirische Schätzungen der neukeynesianischen Phillipskurve unterstützen deren hybride Version mit einem positiven Gewicht auf vergangener Inflation und einem Gewicht auf künftiger erwarteter Inflation, das kleiner als eins ist. Wir argumentieren, dass myopisches Verhalten einiger Agenten für das (theoretisch zu kleine) Gewicht auf der künftigen Inflation verantwortlich ist. Wenn künftige Informationen Kosten verursachen, kann das positive Gewicht auf vergangener Inflation durch Trendpolation erklärt werden. Wir implementieren die Mikrofundierung von Calvo (1983) in ein Laborexperiment. Beide Hypothesen werden durch unsere Experimente unterstützt. Etwa die Hälfte der Experimentteilnehmer setzt die theoretisch optimalen Preise während etwa ein Drittel myopisch ist.

This paper examines the small-sample distribution of the instrumental variables (IV) estimation procedure employed by Gali and Gertler (1999) to assess the empirical fit of the New Keynesian Phillips Curve (NKPC) and the hybrid Phillips Curve (HPC). Their estimation method is now widely used to assess the importance of firms that act in a backward- looking manner. Unfortunately, the IV method is highly sensitive to the way the hybrid model is normalized. Using Monte Carlo simulations, I find that one normalization used by Gali and Gertler (and others) finds evidence of backward-looking firms even when there is none by construction. In addition, the IV estimates are also sensitive to the choice of normalization in a broader range of specifications. Using Monte Carlo experiments, I identify which normalizations work better than others. Finally, I find that the bootstrapped standard errors are, not surprisingly, bigger than the asymptotic ones reported by Gali and Gertler. When using my preferred normalization, I find that the NKPC is rejected at the 5 percent but not at the 1 percent level.

This paper examines the small-sample distribution of the instrumental variables (IV) estimation procedure employed by Gali and Gertler (1999) to assess the empirical fit of the New Keynesian Phillips Curve (NKPC) and the hybrid Phillips Curve (HPC). Their estimation method is now widely used to assess the importance of firms that act in a backward-looking manner. Unfortunately, the IV method is highly sensitive to the way the hybrid model is normalized. Using Monte Carlo simulations, I find that one normalization used by Gali and Gertler (and others) finds evidence of backward-looking firms even when there is none by construction. In addition, the IV estimates are also sensitive to the choice of normalization in a broader range of specifications. Using Monte Carlo experiments, I identify which normalizations work better than others. Finally, I find that the bootstrapped standard errors are, not surprisingly, bigger than the asymptotic ones reported by Gali and Gertler. When using my preferred normalization, I find that the NKPC is rejected at the 5 percent but not at the 1 percent level

The last years have witnessed a sharp increase of interest in monetary policy rules (see Taylor [1999]). This normative branch of monetary policy tries to evaluate the performance of alternative monetary policy rules in terms of associated monetary policy outcomes. Nevertheless this exercise is crucially based on the assumption that key parameters of the model are realistically specified. This holds in particular true for the preference vector of the central bank which trades off the individual goal variables of monetary policy and the degree of forward lookingness in the Phillips curve and the IS equation. Based on matching moments and the implied autocorrelations and cross correlations we present evidence for the USA covering the term of Allan Greenspan (1987:4- 2002:2) that hybrid specifications of the Phillips curve and the IS-curve are characterized by approximately 60% of backward looking economic agents. The predominant goal of monetary policy is price stability and financial market stability. Output gap stabilizationonly seems to play a minor role as an independent goal for the conduct of monetary policy.

Successful descriptions of short-term nominal interest rates inertial behavior have frequently been obtained with small scale macro models in which a Central Banker minimizes a loss function embedding an argument labelled as interest rate smoothing. The rationale for this argument is not straightforward. Indeed, there has been a lively debate about it in the literature. In this paper we perform an empirical exercise to evaluate the relationship existing between private sector's rational expectations and interest rate gradualism. Our findings strongly support rational expectations as an element capable to remarkably reduce the importance of the interest rate smoothing weight in replicating the observed path of the federal funds rate. However, we find a predominance of adaptive expectations in shaping the paths of inflation ad output gap. Our results also suggest that the Fed has followed a 'Strict Inflation Targeting' strategy under Greenspan's regime.