Estimating a hybrid New Keynesian Phillips curve for Sweden : An instrumental variables approach

Abstract: Previous estimates suggest that there has been a flattening of the Swedish Phillips curve after the global financial crisis of 2008. This apparent flattening is a global phenomenon that has led many economists to search for an explanation. Recent studies suggest that part of the apparent flattening can be explained by failure to overcome the endogeneity problem of the Phillips curve that arise from measurement error and cost-push shocks. In this study I investigate this previously unexplored potential explanation for the Swedish data by estimating a hybrid New Keynesian Phillips curve for Sweden using the instrumental variables approach of Barnichon and Mesters (2020). The approach uses a sequence of lagged monetary policy shocks as instruments and relies on weak instrument robust test statistic for inference. The point estimates vary substantially with changes in the number of lagged instruments and the weak instrument robust confidence intervals are not significant for any number of lags. This indicates that the weak instrument problem is too severe for the Swedish data to provide a practical solution to the puzzle of the Swedish Phillips curve. The conclusion from this study is therefore that is not possible to estimate an unbiased hybrid New Keynesian Phillips curve for Sweden using aggregate time series data.