THE EMPIRICAL (IR)RELEVANCE OF THE NEW KEYNESIAN PHILLIPS CURVE.
Eilev S. Jansen
We give an appraisal of the New Keynesian Phillips curve (NPC) as an empirical
model of European inflation. We show that existing evidence reported in
favour of the NPC on Euro-area and country data is due to a corroborative
research strategy. In particular, goodness-of-fit is a weak criterion,
since the NPC-fit is well approximated by a random walk. Instead we report
of more critical tests, and the importance of modelling a system that
includes the forcing variables as well as the rate of inflation is emphasized.
Finally, encompassing tests are applied to open economy versions of the
NPC for UK and Norway.