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Max-Sebastian Dovì

2 December 2021
Endogeneity of the labour market slack in reduced-form Phillips Curves (PCs) is usually addressed either by including proxies for omitted supply shocks, or by using instrumental variables. Using the Kiviet (2020) Kinky Least Squares estimator, we find evidence that supply-shock proxies should not be omitted from PCs, and that many popular instrumental variables seem to be invalid. We estimate a standard backward-looking wage Phillips Curve by Kinky Least Squares and find that unless a large negative correlation between the slack variable and the error term is assumed, the coefficient of the slack variable is significantly negative.
JEL Code
C1 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General
E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles