Do Professional Forecasters Behave as if They Believed in the New Keynesian Phillips Curve for the Euro Area?

Abstract

This paper finds that participants in the European Central Bank’s Survey of Professional Forecasters have submitted forecasts that are consistent with a (mostly forward-looking) New Keynesian Phillips Curve for the euro area. The estimation results suggest that euro-area inflation forecasts have reacted less to unemployment forecasts after the start of the financial crisis but another cost measure (energy inflation) remains significant. This finding is consistent with the claim by the International Monetary Fund that the Phillips Curve has recently become flatter in the euro area. However, the reasons suggested by the Fund for this finding, namely a better anchoring of inflation expectations and increases in structural unemployment do not seem to find support in the survey data. Instead, downward wage rigidities may be playing a prominent role.