Interpreting the evidence for new Keynesian models of inflation dynamics

Abstract We present a framework for interpretation of the empirical results of New Keynesian models of in ‡ation dynamics. Both the rational expectations solution of the structural New Keynesian Phillips curve, NKPC, and the reduced form VAR analysis of the multivariate time series properties give insight about the joint implications of the evidence in the NKPC literature. For example, we show that the unit-root form of non-stationary may be implied for in ‡ation even though the econometric model initally assumed stationarity. The uniqueness and form of a rational expectations solution may depend on whether dynamic (in)homogeneity is present, and on the size of the forward-coe¢ cient in the NKPC