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Output, Inflation and the New Keynesian Phillips Curve

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  • Jagjit Chadha
  • Charles Nolan

Abstract

Explicit modelling of factor markets clarifies two fundamental aspects of the New Keynesian Phillips Curve (NKPC). First, we clarify the relationship between output and marginal cost. Second, for the NKPC in inflation-output space, we identify the key stochastic influences on inflation without recourse to ad hoc cost or excess demand shocks. The econometric implementation of this clarified NKPC, which evolves strictly according news on the stream of future marginal costs, allows us jointly to derive inflation as a forecast of future variables. Our approach clarifies the empirical successes and failures of the NKPC and allows us to provide new aggregate evidence on the degree of price rigidity in the UK economy.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 18 (2004)
Issue (Month): 3 ()
Pages: 271-287

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Handle: RePEc:taf:irapec:v:18:y:2004:i:3:p:271-287

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Related research

Keywords: Inflation; Phillips curve; marginal cost; output gap; factor markets; price stickiness;

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References

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  1. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
  2. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  3. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
  4. King, Robert G. & Wolman, Alexander L., 2013. "Inflation Targeting in a St. Louis Model of the 21st Century," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 543-574.
  5. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  6. Woodford Michael, 2002. "Inflation Stabilization and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-53, February.
  7. King, Robert G & Watson, Mark W, 1996. "Money, Prices, Interest Rates and the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 35-53, February.
  8. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November.
  9. Chadha, Jagjit S & Nolan, Charles, 2002. "Inflation and Price Level Targeting in a New Keynesian Model," Manchester School, University of Manchester, vol. 70(4), pages 570-95, Special I.
  10. Laurence Ball, 2000. "Near-Rationality and Inflation in Two Monetary Regimes," NBER Working Papers 7988, National Bureau of Economic Research, Inc.
  11. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  12. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  13. Argia M. Sbordone, 2001. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Departmental Working Papers 199822, Rutgers University, Department of Economics.
  14. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  15. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
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Cited by:
  1. Chadha, J.S. & Nolan, C., 2003. "On the Interaction of Monetary and Fiscal Policy," Cambridge Working Papers in Economics 0303, Faculty of Economics, University of Cambridge.
  2. Buiter, Willem H, 2004. "Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap," CEPR Discussion Papers 4202, C.E.P.R. Discussion Papers.
  3. Andreas Billmeier, 2009. "Ghostbusting: which output gap really matters?," International Economics and Economic Policy, Springer, vol. 6(4), pages 391-419, December.
  4. Christopher Tsoukis & George Kapetanios & Joseph Pearlman, 2011. "Elusive Persistence: Wage And Price Rigidities, The New Keynesian Phillips Curve And Inflation Dynamics," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 737-768, 09.
  5. Chris Tsoukis & George Kapetanios & Joseph Pearlman, 2007. "The Elusive Persistence: Wage and Price Rigidities, the Phillips Curve, and Inflation Dynamics," Working Papers 619, Queen Mary, University of London, School of Economics and Finance.
  6. Jesús Antonio Bejarano Rojas, 2005. "Estimación Estructural Y Análisis De La Curva De Phillips Neokeynesiana Para Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.

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