Addressing the endogeneity of slack in Phillips Curves

Arbeitspapier

Endogeneity of the labour market slack in reduced-form Phillips Curves (PCs) is usually addressed either by including proxies for omitted supply shocks, or by using instrumental variables. Using the Kiviet (2020) Kinky Least Squares estimator, we find evidence that supply-shock proxies should not be omitted from PCs, and that many popular instrumental variables seem to be invalid. We estimate a standard backward-looking wage Phillips Curve by Kinky Least Squares and find that unless a large negative correlation between the slack variable and the error term is assumed, the coefficient of the slack variable is significantly negative.

Object Details

• ISBN: 978-92-899-4872-2
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2619

Classification and Topics

• Classification: Wirtschaft
• Subject: Phillips Curves ; instrument-free inference ; limited-information inference

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dovì, Max-Sebastian ; Koester, Gerrit ; Nickel, Christiane
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2021

Further information

• DOI: doi:10.2866/018197
• Handle: http://hdl.handle.net/10419/249892
• Last update: 10.03.2025, 11:44 AM CET