Abstract :
Galı´ and Gertler [1999. Inflation dynamics: a structural econometric approach. Journal of
Monetary Eonomics 44(2), 195–222] developed a hybrid variant of the NewKeynesian Phillips curve
that relates inflation to real marginal cost, expected future inflation and lagged inflation. GMM
estimates of the model suggest that forward-looking behavior is dominant: the coefficient on
expected future inflation substantially exceeds the coefficient on lagged inflation. While the latter
differs significantly from zero, it is quantitatively modest. Several authors have suggested that our
results are the product of specification bias or suspect estimation methods. Here we show that these
claims are incorrect, and that our results are robust to a variety of estimation procedures, including
GMM estimation of the closed form, and nonlinear instrumental variables. Also, as we discuss, many
others have obtained very similar results to ours using a systems approach, including FIML
techniques. Hence, the conclusions of GG and others regarding the importance of forward-looking
behavior remain robust.
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