Subjective Expectations and New Keynesian Phillips Curves in Europe

Abstract

This paper assesses the empirical performance of the forward-looking new Keynesian Phillips curve (NKPC) in France, Germany and Italy for the period 1991.3-2004.4. Instead of imposing rational expectations, I use direct measures of inflation expectations constructed from Consensus Economics survey data. Dependent on the real marginal costs measure, I obtain significant and plausible estimates for the quarterly discount factor and the price rigidity parameter. When analyzing the role of lagged inflation, I find that only in France lagged inflation does not have explanatory power beyond predicting expected inflation. This suggests that only in France the standard forward-looking NKPC effectively captures quarterly inflation dynamics.

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