| Chapter 1 examines the small-sample distribution of the instrumental variables (IV) estimation procedure employed by Cali and Gertler (1999) to assess the empirical fit of the New Keynesian Phillips Curve (NKPC) and the hybrid Phillips Curve (HPC). Unfortunately, the IV method is highly sensitive to the way the hybrid model is normalized. Using Monte Carlo simulations, I find that one normalization used by Cali and Gertler (and others) finds evidence of backward-looking firms even when there is none by construction. In addition, the IV estimates are also sensitive to the choice of normalization in a broader range of specifications. Using Monte Carlo experiments, I identify which normalizations work better than others. Finally, I find that the bootstrapped standard errors are, not surprisingly, bigger than the asymptotic ones reported by Gali and Gertler. When using my preferred normalization, I find that the NKPC is rejected at the 5 percent but not at the 1 percent level.; Chapter 2 estimates NKPCs and HPCs for three European countries. Using a new data set, I assess whether the empirical estimates are robust to open-economy considerations. Moreover, the "goodness-of-fit" of the NKPCs is examined, following Sbordone's (2002) and Gali and Gertler's (1999) work on U.S. data. The favorable IV results previously found in the literature are confirmed while the "goodness-of-fit" test does not look favorable for the NKPC or its HPC extensions in any of the European countries examined. Moreover, allowing for open-economy considerations neither changes the IV estimation results much nor does it make the visual impression look better.; Chapter 3 estimates NKPCs in the "traded" sectors of three large European countries: France, Italy and Spain. Given that the traded sectors rely heavily on inputs from other domestic and foreign sectors, gross output is assumed to be produced using a combination of value-added and materials. Moreover, I stress the importance of using gross output prices rather than value-added deflators as the measure of inflation. I find that the NKPC fits European data for the traded sector well once the sector's reliance on intermediate inputs is taken into account. |
