Output gaps and the New Keynesian Phillips curve: An application of the Empirical Mode Decomposition

The output gap is a useful guide for economic slack and inflation dynamics. This paper employs a newly developed filtering approach called empirical mode decomposition to measure the output gap and examines the empirical validity of the New Keynesian Phillips curves (NKPC) using this output gap measure. First, the cyclical events as identified by the National Bureau of Economic Research (NBER) are evident in the output gap. Second, I obtain significant parameter estimates of the sign predicted by the NKPC theory. The output gap also outperforms the labor income share and the output growth as the proxy for economic activity.