[Estimating the New Keynesian Phillips Curve (NKPC) with Fat-tailed Events]
Radeef Chundakkadan
Dear All,
The Department of Economics, IIT Bombay, welcomes you to a seminar by Kaustubh on March 25th, 2025 at 3:30 pm. More details are below:
Speaker: Kaustubh (RBI)
Date and Time: Mar 25th, 2025 (Wednesday); 3:30 PM
Venue: Room no. 401, Seminar Hall, 4th floor, A91 Eco Hub Building, Department of Economics, IIT Bombay
Title: Estimating the New Keynesian Phillips Curve (NKPC) with Fat-tailed Events
Abstract: This paper estimates the New Keynesian Phillips Curve while explicitly accounting for large, unexpected shocks such as COVID-19. The pandemic introduced distortions in conventional output gap estimates derived from standard trend-cycle decomposition methods (HP filter, BP filter, Kalman filter). To address this issue, we propose a modified unobserved components model (UCM) that incorporates an additional Student-t distributed irregular component, enabling clearer separation of transitory outlier shocks from trend and cycle dynamics. We further develop a model-based measure of inflation expectations that captures adaptive learning from historical inflation patterns alongside real-time updating during the pandemic period. For India, our findings support a stable linear NKPC specification. The results highlight the importance of explicitly modelling fat-tailed events for obtaining reliable Phillips Curve estimates, particularly in emerging market economies. Finally, we construct a small closed-economy macroeconomic model for India, linking monetary policy responses to the proposed fat-tail robust NKPC and UCM framework
Regards,
Radeef Chundakkadan
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