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Estimating the New Keynesian Phillips Curve: A Vertical Production Chain Approach

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ADAM HALE SHAPIRO

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Abstract

It has become customary to estimate the New Keynesian Phillips Curve (NKPC) with generalized method of moments using a large instrument set that includes lags of variables that are ad hoc to the firm's price-decision problem. Researchers have also conventionally used real unit labor cost (RULC) as the proxy for real marginal cost even though it is difficult to support its significance. This paper introduces a new proxy for the real marginal cost term as well as a new instrument set, both of which are based on the micro foundations of the vertical chain of production. I find that the new proxy, based on input prices as opposed to wages, provides a more robust and significant fit to the model. Instruments that are based on the vertical chain of production appear to be both more valid and relevant toward the model. Copyright (c) 2008 The Ohio State University.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2008.00130.x
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 40 (2008)
Issue (Month): 4 (06)
Pages: 627-666
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Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:4:p:627-666

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  1. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
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  2. repec:cup:etheor:v:9:y:1993:i:2:p:222-40 is not listed on IDEAS
  3. Woodford, Michael, 2005. "Firm-Specific Capital and the New Keynesian Phillips Curve," MPRA Paper 825, University Library of Munich, Germany. [Downloadable!]
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  4. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Gali, Jordi & Gertler, Mark & David Lopez-Salido, J., 2005. "Robustness of the estimates of the hybrid New Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1107-1118, September. [Downloadable!] (restricted)
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  6. Basu, Susanto, 1995. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," American Economic Review, American Economic Association, vol. 85(3), pages 512-31, June. [Downloadable!] (restricted)
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  7. Cogley, Timothy W. & Sbordone, Argia M., 2005. "A Search for a Structural Phillips Curve," Working Papers 05-10, University of California at Davis, Department of Economics. [Downloadable!]
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  8. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  9. Sbordone, Argia M., 2005. "Do expected future marginal costs drive inflation dynamics?," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1183-1197, September. [Downloadable!] (restricted)
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  10. Martin Eichenbaum & Jonas D.M. Fisher, 2003. "Testing the Calvo model of sticky prices," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 40-53. [Downloadable!]
  11. Olivier Blanchard & Jordi Gali, 2005. "Real Wage Rigidities and the New Keynesian Model," NBER Working Papers 11806, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May. [Downloadable!] (restricted)
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  19. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  22. Cragg, John G. & Donald, Stephen G., 1993. "Testing Identifiability and Specification in Instrumental Variable Models," Econometric Theory, Cambridge University Press, vol. 9(02), pages 222-240, April. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. William Barnett & Evgeniya Aleksandrovna Duzhak, 2008. "Empirical Assessment of Bifurcation Regions within New Keynesian Models," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200811, University of Kansas, Department of Economics, revised Oct 2008. [Downloadable!]
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  2. Barnett, William A. & Duzhak, Evgeniya A., 2007. "Non-Robust Dynamic Inferences from Macroeconometric Models: Bifurcation Stratification of Confidence Regions," MPRA Paper 6005, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. George Bratsiotis & Wayne Robinson, 2009. "Non-Labor Unit Costs, Marginal Costs and the New Keynesian Phillips Curve," Centre for Growth and Business Cycle Research Discussion Paper Series 123, Economics, The Univeristy of Manchester. [Downloadable!]
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