The Hybrid New Keynesian Phillips Curve with Multiple Lags of Inflation ()
ABSTRACT
In deriving the hybrid new Keynesian Phillips curve
(HNKPC) in Galí and Gertler (1999) and Holmberg (2006), it is assumed that backward-looking firms index their prices to the
average prices newly set last period plus last period’s inflation rate,
resulting in a Phillips curve equation that relates current inflation to a
demand variable, expected future inflation, and last period’s inflation. The
present study generalizes the derivation of the HNKPC to allow firms to index
prices to multiple lags of inflation, resulting in a HNKPC in which current inflation
depends on multiple lags of inflation instead of only one lag of inflation,
providing theoretical justification for empirical specifications of the HNKPC
that include more than one lag of inflation.
Share and Cite:
Campbell III, C. (2020) The Hybrid New Keynesian Phillips Curve with Multiple Lags of Inflation.
Theoretical Economics Letters,
10, 292-298. doi:
10.4236/tel.2020.102019.