Trend inflation and weak identification in the New Keynesian Phillips curve

Abstract

In this work, we estimate the generalized New Keynesian Phillips curve (GNKPC) us- ing monetary shocks as instruments. We employ an approach that is robust to weak instruments and is valid regardless of the shocks’ variance contribution to construct con- fidence intervals. Our point estimates suggest that not considering trend inflation tends to overestimate the cost of disinflation. We also show that the effects of expectational terms are not stable. Finally, we show considerable uncertainty about the true values of the parameters of the GNKPC, as in some cases the confidence intervals are unbounded. These findings have important implications for monetary policy and indicate that cau- tion should be exercised in the choices and calibrations of dynamic stochastic general equilibrium models.