Ruhr Economic Papers
Ruhr Economic Papers #281
The New Keynesian Phillips Curve with Myopic Agents
by Andreas Orland and Michael W.M. Roos
RUB, 09/2011, 40 S./p., 8 Euro, ISBN 978-3-86788-326-9download
Empirical estimations of the New Keynesian Phillips curve support hybrid versions with a positive weight on lagged inflation and a weight less than one on expected inflation. We argue that myopic price setting of some agents explains the low weight on expected inflation. The lagged term can be explained by trend extrapolation if information about the future is costly. In a laboratory experiment we implement the Calvo (1983) microfoundations of the Phillips curve. Both of our hypotheses are supported by the experimental data. About half of the subjects set optimal Calvo prices while about a third is myopic.
JEL-Classification: C91, D92, E52
Keywords: Hybrid Phillips curve; experimental economics; myopia; behavioral macroeconomics