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Output, Inflation and the New Keynesian Phillips Curve

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Author Info

  • 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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File URL: http://www.tandfonline.com/doi/abs/10.1080/0269217042000227060
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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. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  2. Argia M. Sbordone, 2001. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Departmental Working Papers 200112, Rutgers University, Department of Economics.
  3. Laurence Ball, 2000. "Near-rationality and inflation in two monetary regimes," Proceedings, Federal Reserve Bank of San Francisco.
  4. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  5. Robert G. King & Alexander L. Wolman, 1996. "Inflation Targeting in a St. Louis Model of the 21st Century," NBER Working Papers 5507, National Bureau of Economic Research, Inc.
  6. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Mankiw, N. Gregory & Reis, Ricardo, 2002. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Scholarly Articles 3415324, Harvard University Department of Economics.
  8. Chadha, J.S. & Charles Nolan, 2002. "Inflation and Price Level Targeting in a New Keynesian Model," Cambridge Working Papers in Economics 0203, Faculty of Economics, University of Cambridge.
  9. Michael Woodford, 2001. "Inflation Stabilization and Welfare," NBER Working Papers 8071, National Bureau of Economic Research, Inc.
  10. 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.
  11. John Y. Campbell, 1988. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," NBER Working Papers 1805, National Bureau of Economic Research, Inc.
  12. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  13. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  14. 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.
  15. 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.
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Citations

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Cited by:
  1. 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.
  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. 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.
  4. Andreas Billmeier, 2009. "Ghostbusting: which output gap really matters?," International Economics and Economic Policy, Springer, vol. 6(4), pages 391-419, December.
  5. 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.
  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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