Tuesday, October 12, 2010: 9:10 AM
Inflationary expectations play an important role in monetary policy and in the estimation of the New Keynesian Phillips Curve (NKPC). In this paper, I exploit the difference between the yield on nominal treasury securities and Treasury Inflation Protected Securities (TIPS), in order to obtain a ‘market based’ measure of expected inflation. Galí and Gertler’s (1999) reduced form version of the NKPC is estimated over the same sample, and these estimates are compared with the estimates obtained using the TIPS derived measure of expected inflation. The results indicate that that the TIPS derived measure of expected inflation is statistically significant when included in the model.