The New Keynesian Phillips Curve and the Role of Expectations: Evidence from the Ifo World Economic Survey

We provide evidence on the fit of the hybrid New Keynesian Phillips curve for selected euro\nzone countries, the US and the UK. Instead of imposing rational expectations and estimating\nthe Phillips curve by the Generalized Method of Moments, we follow Roberts (1997) and\nAdam and Padula (2003) and use direct measures of inflation expectations. The data source is\nthe Ifo World Economic Survey, which quarterly polls economic experts about their expected\nfuture development of inflation. Our main findings are as follows: (i) In comparison with the\nrational expectations approach, backward-looking behaviour turns out to more relevant for\nmost countries in our sample. (ii) The use of survey data for inflation expectations yields a\npositive slope of the Phillips curve when the output gap is used as a measure for marginal\ncost.