Franses (Empir Econ, 2018. ) criticised the practice in the empirical literature of replacing expected inflation by the sum of realised future inflation and an error in estimating the parameters of the new Keynesian Phillips curve (NKPC). In particular, he argued that this assumption goes against the Wold decomposition theorem and makes the error term in the hybrid NKPC equation correlated with future inflation, invalidating the maximum likelihood (ML) estimator of Lanne and Luoto (J Econ Dyn Control 37:561-570, 2013). We argue that despite the correlation, the Wold theorem is not violated, and the ML estimator is consistent.
Fields of Science
- 511 Economics