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Licensed Unlicensed Requires Authentication Published by De Gruyter May 18, 2017

Estimating the New Keynesian Phillips Curve for the UK: evidence from the inflation-indexed bonds market

Hardik A. Marfatia

Abstract

This paper utilizes the information in the inflation-indexed bonds market to estimate the New Keynesian Phillips Curve for the UK using an unobserved component approach. The main advantage of this approach comes from using the Kalman filter to explicitly estimate the unobserved expected inflation from the observed break-even inflation rates – the yield difference between the inflation-indexed bonds and the nominal bonds. Our results show that the expected inflation estimated from the unobserved component model plays a significant role in explaining the inflation dynamics in the UK. The evidence also suggests that the estimated inflation expectations are better able to capture the evolution of actual inflation process as compared to the break-even inflation rate as a proxy for expected inflation.

JEL Classification: E31; E32; C32

Acknowledgement

Much thanks to N. Kundan Kishor and anonymous referees for all the useful comments and suggestions.

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Published Online: 2017-5-18

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