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A Factor-Augmented New Keynesian Phillips Curve for the European Union Countries

Norkute, Milda LU and Westerlund, Joakim LU (2024) In Oxford Bulletin of Economics and Statistics 86(4). p.794-810
Abstract

In this paper, a factor-augmented version of the New Keynesian Phillips curve (NKPC) is assessed using a data set comprised of a large panel of European Union (EU) member countries. The factor-augmentation is natural given that country-level inflation rates are highly co-moving. The presence of unattended common factors is important because it raises the issue of omitted variables bias, as the real marginal cost, which is a regressor of the NKPC, is likely to load on the same factors as inflation. One possibility here is to employ the regular instrumental variables approach. However, if the external instruments load on the same factors as the error term of the NKPC, the instruments would be invalid and the results would therefore likely... (More)

In this paper, a factor-augmented version of the New Keynesian Phillips curve (NKPC) is assessed using a data set comprised of a large panel of European Union (EU) member countries. The factor-augmentation is natural given that country-level inflation rates are highly co-moving. The presence of unattended common factors is important because it raises the issue of omitted variables bias, as the real marginal cost, which is a regressor of the NKPC, is likely to load on the same factors as inflation. One possibility here is to employ the regular instrumental variables approach. However, if the external instruments load on the same factors as the error term of the NKPC, the instruments would be invalid and the results would therefore likely be misleading. Motivated by this last observation, the present paper proposes a new estimator of the NKPC that allows for very general forms of factor dependencies and endogeneity. Our results provide evidence in support of the NKPC, but only after the presence of common factors has been appropriately accounted for.

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author
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organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Oxford Bulletin of Economics and Statistics
volume
86
issue
4
pages
794 - 810
publisher
Wiley-Blackwell
external identifiers
  • scopus:85192699437
ISSN
0305-9049
DOI
10.1111/obes.12614
language
English
LU publication?
yes
id
06cca222-c492-4852-a96a-f9f6b9caeaf5
date added to LUP
2024-05-29 15:15:17
date last changed
2024-10-14 12:00:04
@article{06cca222-c492-4852-a96a-f9f6b9caeaf5,
  abstract     = {{<p>In this paper, a factor-augmented version of the New Keynesian Phillips curve (NKPC) is assessed using a data set comprised of a large panel of European Union (EU) member countries. The factor-augmentation is natural given that country-level inflation rates are highly co-moving. The presence of unattended common factors is important because it raises the issue of omitted variables bias, as the real marginal cost, which is a regressor of the NKPC, is likely to load on the same factors as inflation. One possibility here is to employ the regular instrumental variables approach. However, if the external instruments load on the same factors as the error term of the NKPC, the instruments would be invalid and the results would therefore likely be misleading. Motivated by this last observation, the present paper proposes a new estimator of the NKPC that allows for very general forms of factor dependencies and endogeneity. Our results provide evidence in support of the NKPC, but only after the presence of common factors has been appropriately accounted for.</p>}},
  author       = {{Norkute, Milda and Westerlund, Joakim}},
  issn         = {{0305-9049}},
  language     = {{eng}},
  number       = {{4}},
  pages        = {{794--810}},
  publisher    = {{Wiley-Blackwell}},
  series       = {{Oxford Bulletin of Economics and Statistics}},
  title        = {{A Factor-Augmented New Keynesian Phillips Curve for the European Union Countries}},
  url          = {{http://dx.doi.org/10.1111/obes.12614}},
  doi          = {{10.1111/obes.12614}},
  volume       = {{86}},
  year         = {{2024}},
}