The Anatomy of the New Keynesian Phillips Curve

Critical challenges in estimating the New Keynesian Phillips Curve (NKPC) equation lay in measuring the expectations of future inflation in the first part of the equation and choosing the driving variables in the second. Inflation expectations are not directly observable, and there is no agreement in the literature on the choice of driving variables. Hence the estimated NKPC is affected by various choices on inflation characteristics and the driving variable. Additionally, publication bias can be a salient factor affecting the variation of estimates. We use modern meta-analysis tools to study the impact of the estimated NKPC characteristics and publication bias in the literature. Finally, we conclude that heterogeneity in the chosen characteristics significantly affects the estimation of the NKPC equation and the resulting implications of the expected inflation and driving variable on the real economy. In conclusion, the research characteristics of the expected inflation and driving variable affect the real economy. Hence, our findings are important in understanding the role of heterogeneous characteristics in the implications of the estimated NKPC.