Testing the Invariance of Expectations Models of Inflation

Jennifer L. Castle, Jurgen A. Doornik, David F. Hendry and Ragnar Nymoen

Memo 21/2010

Les memo

The new-Keynesian Phillips curve (NKPC) includes expected future inflation as a major feedforward variable to explain current inflation. Models of this type are regularly estimated by replacing the expected value by the actual future outcome, then using Instrumental Variables or Generalized Method of Moments methods to estimate the parameters. However, the underlying theory does not allow for various forms of non-stationarity in the data–despite the fact that crises, breaks and regimes shifts are relatively common. We investigate the consequences for NKPC estimation of breaks in data processes using the new technique of impulse-indicator saturation, and apply the resulting methods to salient published studies to check their viability.

Published June 20, 2014 1:42 PM - Last modified Jan. 24, 2019 11:44 AM