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Along the New Keynesian Phillips curve with nominal and real rigidities

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  • James M. Nason
  • George A. Slotsve

Abstract

The new Keynesian Phillips curve (NKPC) has become central to monetary theory and policy. A seemingly benign NKPC prediction is that trend shocks dominate price level fluctuations at all forecast horizons. Since the NKPC cycle of the U.S. GDP deflator peaks at each of the last seven NBER dated recessions, support for the NKPC is limited. The authors develop monetary business cycle models that contain different combinations of nominal (sticky-price) and real (labor market search) rigidities to understand this puzzle. Simulations indicate that a model combining labor market search and flexible prices is better able to match actual price level movements than sticky-price models do. This model represents a challenge to claims that sticky prices are a key part of the monetary transmission mechanism.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2004-9.

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Date of creation: 2004
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Handle: RePEc:fip:fedawp:2004-9

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Citations

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Cited by:
  1. Robert R. Reed & Stacey L. Schreft, 2007. "Phillips curves, monetary policy, and a labor market transmission mechanism," Research Working Paper RWP 07-12, Federal Reserve Bank of Kansas City.
  2. Thomas B. King, 2005. "Labor productivity and job-market flows: trends, cycles, and correlations," Supervisory Policy Analysis Working Papers 2005-04, Federal Reserve Bank of St. Louis.
  3. James M. Nason & Gregor W. Smith, 2008. "The New Keynesian Phillips curve : lessons from single-equation econometric estimation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 361-395.
  4. Antonella Trigari, 2006. "The Role of Search Frictions and Bargaining for Inflation Dynamics," Working Papers 304, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  5. James M. Nason & Gregor W. Smith, 2005. "Identifying the New Keynesian Phillips Curve," Working Papers 1026, Queen's University, Department of Economics.
  6. Thomas Lubik & Michael Krause, 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Economics Working Paper Archive 504, The Johns Hopkins University,Department of Economics.
  7. Shigeru Fujita & Garey Ramey, 2012. "Exogenous vs. endogenous separation," Working Papers 12-2, Federal Reserve Bank of Philadelphia.
  8. Richard A. Ashley. & Randall J. Verbrugge., 2006. "Mis-Specification and Frequency Dependence in a New Keynesian Phillips Curve," Working Papers e06-12, Virginia Polytechnic Institute and State University, Department of Economics.

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