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Is the New Keynesian Phillips curve flat?

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Author Info
Keith Kuester () (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.)
Gernot J. Müller () (Goethe University Frankfurt, Senckenberganlage 31, 60325 Frankfurt am Main, Germany.)
Sarah Stölting () (European University Institute, Villa Sao Paolo, via della Piazzuola 43, 50133 Florence, Italy.)

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Abstract

Macroeconomic data suggest that the New Keynesian Phillips curve is quite flat - despite microeconomic evidence implying frequent price adjustments. While real rigidities may help to account for the conflicting evidence, we propose an alternative explanation - if price markup/cost-push shocks are persistent and negatively correlated with the labor share, the latter being a widely used measure for marginal costs, the estimated pass-through of measured marginal costs into inflation is limited, even if prices are fairly flexible. Using a standard New Keynesian model, we show that the GMM approach to the New Keynesian Phillips curve leads to inconsistent and upward biased estimates if cost-push shocks indeed are persistent. Monte Carlo experiments suggest that the bias is quite sizeable - we find average price durations estimated as high as 12 quarters, when the true value is about 2 quarters. Moreover, alternative estimators appear to be biased as well, while standard diagnostic tests fail to signal a misspecification of the model. JEL Classification: E31, E32, C22.

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Paper provided by European Central Bank in its series Working Paper Series with number 809.

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Length: 35 pages
Date of creation: Sep 2007
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Handle: RePEc:ecb:ecbwps:20070809

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Related research
Keywords: Price Rigidities New Keynesian Phillips Curve Cost-push shocks GMM estimation.

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    Other versions:
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