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Wednesday, November 23, 2005

Gali, Gertler, and Lopez-Salido: There is Too a Hybrid New Keynesian Phillips Curve

This paper by Gali, Gertler, and Lopez-Salido is in response to papers such as Modeling Inflation Dynamics: A Critical Survey of Recent Research, by Jeremy B. Rudd and Karl Whelan which states:

Gali and Gertler’s [1999] conclusion that rational forward looking behavior plays the dominant role in these models is widely cited as a stylized fact in this literature. We provide an alternative interpretation of the empirical estimates obtained from these models, and argue that the data actually provide very little evidence of an important role for rational forward-looking behavior of the sort implied by these models.

Gali, Gertler, and Lopez-Salido respond with:

Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve, by Jordi Gali, Mark Gertler, David Lopez-Salido, NBER WP 11788, November 2005: Abstract Galí and Gertler (1999) developed a hybrid variant of the New Keynesian Phillips curve that relates inflation to real marginal cost, expected future inflation and lagged inflation. GMM estimates of the model suggest that forward looking behavior is dominant: The coefficient on expected future inflation substantially exceeds the coefficient on lagged inflation. While the latter differs significantly from zero, it is quantitatively modest. Several authors have suggested that our results are the product of specification bias or suspect estimation methods. Here we show that these claims are incorrect, and that our results are robust to a variety of estimation procedures, including GMM estimation of the closed form, and nonlinear instrumental variables. Also, as we discuss, many others have obtained very similar results to ours using a systems approach, including FIML techniques. Hence, the conclusions of GG and others regarding the importance of forward looking behavior remain robust. Introduction In this paper we show that the estimates of the hybrid New Keynesian Phillips curve presented in Gali and Gertler (1999; henceforth GG) and refined in Gali, Gertler and Lopez- Salido (2001; 2003; henceforth, GGLS) are completely robust to recent criticisms by Rudd and Whelan (2005) and Linde (2005). It follows that the main conclusions in GG and GGLS remain intact. In this section, we first summarize the results in GG and GGLS and then provide a brief summary of the response to our critics. In the sections that follow we offer a more detailed response and also present some new results based on alternative estimation approaches. [Free author web site and Bank of Spain versions. Linde paper here.]

    Posted by on Wednesday, November 23, 2005 at 01:32 AM in Academic Papers, Economics, Inflation, Macroeconomics, Unemployment | Permalink  TrackBack (0)  Comments (0)

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