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 978-3-86788-326-9



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