Estimating New Keynesian Phillips Curves Using Exact Methods
The authors use simple new finite-sample methods to test the empirical relevance of the New Keynesian Phillips curve (NKPC) equation. Unlike tests based on the generalized method of moments, the generalized Anderson-Rubin (1949) tests are immune to the presence of weak instruments and allow, by construction, the identification status of a model to be assessed. The authors illustrate their results using GalÍ and Gertler's (1999) NKPC specifications and data, as well as a survey-based inflation-expectation series from the Federal Reserve Bank of Philadelphia.
The test the authors use rejects GalÍ and Gertler's estimates (conditional on the latters' choice of instruments). Nevertheless, and in contrast with results obtained by Ma (2002), the authors do obtain relatively informative confidence sets. This provides support for NKPC equations and illustrates the usefulness of using exact procedures in estimations based on instrumental variables. The authors' results also reveal that the least well-identified parameter is w; namely, the proportion of firms that do not adjust their prices in period t.