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Alternative measures of marginal cost and inflation in estimations of new Keynesian inflation dynamics

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  • Gwin, Carl R.
  • VanHoose, David D.

Abstract

In an important and highly influential paper [Gali, J., Gertler, M., 1999. Inflation dynamics: A structural econometric analysis. Journal of Monetary Economics 44, 195-222] develop and estimate a structural new Keynesian Phillips curve model of inflation dynamics based on the [Calvo, Guillermo, 1983. Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383-398] model of sticky prices. To estimate their model, Gali and Gertler measure inflation as the quarterly percentage change in the GDP deflator, and they consider a specific calculation of the deviation of labor-income share from its mean value as the only proxy measure of aggregate marginal cost. Most other researchers have followed their lead. In this paper, we closely replicate Gali and Gertler's results and compare these replicated results to those obtained when alternative measures of marginal cost and inflation are utilized. We find that estimations of the structural new Keynesian model of inflation dynamics are not particularly altered by using a marginal-cost measure based on actual industry costs but are sensitive to using a PPI-inflation measure that arguably is more appropriate for testing a theory of firm pricing. Furthermore, we find that utilizing a detrended measure of marginal cost yields results that are at least as plausible as those of Gali and Gertler, yet which generally suggest greater aggregate US price flexibility.

Suggested Citation

  • Gwin, Carl R. & VanHoose, David D., 2008. "Alternative measures of marginal cost and inflation in estimations of new Keynesian inflation dynamics," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 928-940, September.
    • Handle: RePEc:eee:jmacro:v:30:y:2008:i:3:p:928-940
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    1. Mazumder, Sandeep, 2010. "The new Keynesian Phillips curve and the cyclicality of marginal cost," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 747-765, September.
    2. Carl R. Gwin & David D. Van Hoose, 2008. "Disaggregate Evidence On Price Stickiness And Implications For Macro Models," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 561-575, October.
    3. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-188, March.
    4. Agénor, Pierre-Richard & Bayraktar, Nihal, 2010. "Contracting models of the Phillips curve empirical estimates for middle-income countries," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 555-570, June.
    5. PETER McADAM & ALPO WILLMAN, 2013. "Technology, Utilization, and Inflation: What Drives the New Keynesian Phillips Curve?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(8), pages 1547-1579, December.
    6. Bratsiotis, George J. & Robinson, Wayne A., 2016. "Unit Total Costs: An Alternative Marginal Cost Proxy for Inflation Dynamics," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 20(7), pages 1826-1849.
    7. A. Nazif Çatik & Christopher Martin & A. Özlem Onder, 2011. "Relative price variability and the Phillips Curve: evidence from Turkey," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 38(5), pages 546-561, September.
    8. Mazumder, Sandeep, 2011. "Cost-based Phillips Curve forecasts of inflation," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 553-567.
    9. Sandeep Mazumder, 2012. "European Inflation and the New Keynesian Phillips Curve," Southern Economic Journal, John Wiley & Sons, vol. 79(2), pages 322-349, October.
    10. Gwin, Carl & VanHoose, David D., 2012. "Durable goods and sticky prices: Industry-level evidence," Economics Letters, Elsevier, vol. 116(3), pages 460-464.
    11. Martins, Luis F. & Gabriel, Vasco J., 2009. "New Keynesian Phillips Curves and potential identification failures: A Generalized Empirical Likelihood analysis," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 561-571, December.
    12. Mazumder, Sandeep, 2011. "The empirical validity of the New Keynesian Phillips curve using survey forecasts of inflation," Economic Modelling, Elsevier, vol. 28(6), pages 2439-2450.
    13. Malikane, Christopher, 2014. "Traditional Inflation Dynamics," MPRA Paper 61427, University Library of Munich, Germany.

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