Economic Quarterly

Fall 2008

DSGE Model-Based Estimation of the New Keynesian Phillips Curve

Frank Schorfheide

This paper surveys estimates of New Keynesian Phillips curve (NKPC) parameters that have been obtained by fitting fully specified dynamic stochastic general equilibrium (DSGE) models to U.S. data. We examine various sources of identification in the context of a simple analytical model. DSGE model-based NKPC estimates tend to be fragile and sensitive to the model specification, in particular if marginal costs are treated as an unobserved variable. Estimates of the NKPC slope lie between 0 and 4. If the observations span the labor share, which is in most instances the model-implied measure of marginal costs, then the slope estimates fall into a much narrower range of 0.005 to 0.135. No consensus has emerged with respect to the importance of lagged inflation in the Phillips curve.

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