Inflation dynamics: forward or backward looking?
Huiqing Li Central University of Finance and Economics, People’s Republic of China

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This study tests the hybrid New Keynesian Phillips curve using a novel panel dataset of the 50 US states from 1977 to 2018. The results suggest that the hybrid New Keynesian Phillips curve is a robust representation of the evolution of US inflation, and emphasise the role of unit labour cost as a driving variable. Consistent with , we find relatively larger weights for future inflation than for lagged inflation. This finding confirms the theory of forward-looking behaviour. Furthermore, we obtain more evidence of dominant forward-looking behaviour by using principal component-based instruments, finding that using principal components is a good option to overcome weak identifications.

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