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The new Keynesian Phillips curve and the cyclicality of marginal cost

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  • Mazumder, Sandeep

Abstract

Several authors argue that if the labor income share is used as the proxy for real marginal cost, then the New Keynesian Phillips Curve does a good job of approximating US inflation dynamics. However, this paper argues that the labor share is not an ideal measure of real marginal cost for two reasons: it is countercyclical whereas marginal cost is likely to be procyclical, and it assumes that labor can be costlessly adjusted at a fixed real wage rate. Relaxing this assumption to a more realistic one leads to a measure of marginal cost that does turn out to be procyclical, which when tested produces results that are contradictory to the entire underlying model of the NKPC. Indeed, this paper argues that having procyclical marginal cost precludes us from even having the correct coefficient signs in the NKPC, which highlights a major problem that exists in the model.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 32 (2010)
Issue (Month): 3 (September)
Pages: 747-765

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Handle: RePEc:eee:jmacro:v:32:y:2010:i:3:p:747-765
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

Keywords: Inflation Phillips curve Marginal cost;

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Cited by:

  1. Sandeep Mazumder, 2011. "The Long-Run Relationship Between Inflation and the Markup in the U.S," Economics Bulletin, AccessEcon, vol. 31(1), pages 473-484.
  2. Malikane, Christopher, 2014. "A new Keynesian triangle Phillips curve," Economic Modelling, Elsevier, vol. 43(C), pages 247-255.
  3. Peter McAdam & Alpo Willman, 2012. "Technology, Utilization and Inflation: What Drives the New Keynesian Phillips Curve?," School of Economics Discussion Papers 0912, School of Economics, University of Surrey.
  4. Mazumder, Sandeep, 2011. "Cost-based Phillips Curve forecasts of inflation," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 553-567.
  5. George J. Bratsiotis & Wayne A. Robinson, 2014. "Unit Total Costs: An Alternative Marginal Cost Proxy for Inflation Dynamics," Centre for Growth and Business Cycle Research Discussion Paper Series 192, Economics, The Univeristy of Manchester.
  6. Laurence Ball & Sandeep Mazumder, 2011. "Inflation Dynamics and the Great Recession," Economics Working Paper Archive 580, The Johns Hopkins University,Department of Economics.
  7. Jaromir Baxa & Miroslav Plasil & Borek Vasicek, 2013. "Inflation and the Steeplechase Between Economic Activity Variables," Working Papers 2013/15, Czech National Bank, Research Department.
  8. Malikane, Christopher, 2014. "Traditional Inflation Dynamics," MPRA Paper 61427, University Library of Munich, Germany.
  9. Kajuth, Florian, 2012. "Identifying the Phillips curve through shifts in volatility," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 975-991.
  10. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, . "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Working Paper 84656, Harvard University OpenScholar.
  11. Malikane, Christopher, 2012. "The Microfoundations of the Keynesian Wage-Price Spiral," MPRA Paper 42923, University Library of Munich, Germany, revised 2012.
  12. Murphy, Robert G., 2014. "Explaining inflation in the aftermath of the Great Recession," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 228-244.
  13. Abbas, Syed K. & Bhattacharya, Prasad Sankar & Sgro, Pasquale, 2016. "The new Keynesian Phillips curve: An update on recent empirical advances," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 378-403.
  14. Christopher Malikane & Tshepo Mokoka, 2014. "The new Keynesian Phillips curve: endogeneity and misspecification," Applied Economics, Taylor & Francis Journals, vol. 46(25), pages 3082-3089, September.

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