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Inflation dynamics: A structural econometric analysis

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  • Jordi Galí

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  • Mark Gertler

Abstract

We develop and estimate a structural model of inflation that allows for a fraction of firms that use a backward looking rule to set prices. The model nests the purely forward looking New Keynesian Phillips curve as a particular case. We use measures of marginal costs as the relevant determinant of inflation, as the theory suggests, instead of an ad-hoc output gap. Real marginal costs are a significant and quantitatively important determinant of inflation. Backward looking price setting, while statistically significant, is not quantitatively important. Thus, we conclude that the New Keynesian Phillips curve provides a good first approximation to the dynamics of inflation.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 341.

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Date of creation: Aug 1998
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Handle: RePEc:upf:upfgen:341

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Web page: http://www.econ.upf.edu/

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Keywords: New Keynesian models; Phillips curve; sticky prices; inflation persistence;

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