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Working Paper Series Addressing the endogeneity of slack in Phillips Curves Max-Sebastian Dov , Gerrit Koester, Christiane Nickel Disclaimer: This Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. No 2619 / December 2021 AbstractEndogeneity of the labour market slack in reduced-form Phillips Curves (PCs) is usuallyaddressed either by including proxies for omitted supply shocks, or by using instrumen-tal variables. Using the Kiviet (2020) Kinky Least Squares estimator, we find evidencethat supply-shock proxies should not be omitted from PCs, and that many popularinstrumental variables seem to be invalid. We estimate a standard backward-lookingwage Phillips Curve by Kinky Least Squares and find that unless a largenegativecor-relation between the slack variable and the error term is assumed, the coefficient of theslack variable is significantly Phillips Curves; instrument-free inference; limited-information inferenceJEL classification C1, E3 ECB Working Paper Series No 2619 / December 20211 Non-Technical SummaryThe relationship between economic slack and inflation as conceptua
ECB Working Paper Series No 2619 / December 2021 2. 1 Introduction Due to its role in the transmission of monetary policy, the causal e ect of economic slack on wage or price in ation is perhaps one of the most widely debated questions in academic and applied macroeconomics. The vast literature on the topic reports a wide range of estimates for ...
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