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2020•Applied Economics LettersRequires access

How to disappear completely: nonlinearity and endogeneity in the New Keynesian Wage Phillips Curve

Daniel Abreu, Artur Silva Lopes

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Abstract

We use a three-regime threshold regression model to assess the ability of the New Keynesian Wage Phillips Curve (NKWPC) to describe wage inflation in the US over the 1965–2018 period. Nonlinearity is clearly supported by the data and it easily resists an endogeneity correction. However, this correction exposes more clearly the shortcomings of the NKWPC as a successful description of wage dynamics in the extreme phases of the business cycles, when unemployment is either low or high. In both cases, it becomes completely flat.

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What this paper is about

We use a three-regime threshold regression model to assess the ability of the New Keynesian Wage Phillips Curve (NKWPC) to describe wage inflation in the US over the 1965–2018 period. Nonlinearity is clearly supported by the data and it easily resists an endogeneity correction. However, this correction exposes more clearly the shortcomings of the NKWPC as a successful description of wage dynamics in the extreme phases of the business cycles, when unemployment is either low or high. In both cases, it becomes completely flat.

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Available abstract

We use a three-regime threshold regression model to assess the ability of the New Keynesian Wage Phillips Curve (NKWPC) to describe wage inflation in the US over the 1965–2018 period. Nonlinearity is clearly supported by the data and it easily resists an endogeneity correction. However, this correction exposes more clearly the shortcomings of the NKWPC as a successful description of wage dynamics in the extreme phases of the business cycles, when unemployment is either low or high. In both cases, it becomes completely flat.

Key concepts: Endogeneity, Phillips curve, Economics, Inflation (cosmology), Unemployment, Keynesian economics, Wage, New Keynesian economics

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