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The B.E. Journal of Macroeconomics

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

Hardik A. Marfatia
  • Corresponding author
  • Assistant Professor, Department of Economics, Northeastern Illinois University, BBH 344G, 5500 N. St. Louis Ave., Chicago, IL 60625, USA, Phone: +1-773-442-5712
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Published Online: 2017-05-18 | DOI: https://doi.org/10.1515/bejm-2016-0005

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.

Keywords: inflation indexed bonds; New Keynesian Phillips Curve; output gap; unobserved component model

JEL Classification: E31; E32; C32

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About the article

Published Online: 2017-05-18


Citation Information: The B.E. Journal of Macroeconomics, Volume 18, Issue 1, 20160005, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2016-0005.

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