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Priors and the Slope of the Phillips Curve

Working Paper 778 | Published March 17, 2021

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Callum Jones Board of Governors of the Federal Reserve System
Mariano Kulish University of Sydney
Juan Pablo Nicolini Senior Research Economist and Universidad Torcuato Di Tella
Priors and the Slope of the Phillips Curve


The slope of the Phillips curve in New Keynesian models is difficult to estimate using aggregate data. We show that in a Bayesian estimation, the priors placed on the parameters governing nominal rigidities significantly influence posterior estimates and thus inferences about the importance of nominal rigidities. Conversely, we show that priors play a negligible role in a New Keynesian model estimated using state-level data. An estimation with state-level data exploits a relatively large panel dataset and removes the influence of endogenous monetary policy.