A search for a Structural Phillips Curve

The foundation of the New Keynesian Phillips curve is a model of price setting with nominal rigidities which implies that the dynamics of ination are well explained by the evolution of real marginal costs. The objective of this pa-per is to analyze whether this is a structurally-invariant relationship. To assess this, we \u85rst estimate an unrestricted time-series model for ination, unit labor costs, and other variables, and present evidence that their joint dynamics are well represented by a vector autoregression with drifting coe ¢ cients and volatil-ities, as in Cogley and Sargent (2004). Then, following Sbordone (2002, 2003), we apply a two-step minimum distance estimator to estimate deep parameters. Taking as given estimates of the unrestricted VAR, we estimate parameters of the NKPC by minimizing a quadratic function of the restrictions that the theoretical model imposes on the reduced form. Our results suggest that it is possible to reconcile a constant-parameter NKPC with the drifting-parameter VAR, and therefore we argue that the price-setting model is structurally in-variant. JEL Classi\u85cation: E3