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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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  • 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.
  • Handle: RePEc:eee:jmacro:v:32:y:2010:i:3:p:747-765
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    Cited by:

    1. Murphy, Robert G., 2014. "Explaining inflation in the aftermath of the Great Recession," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 228-244.
    2. 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.
    3. Florian Kajuth, 2016. "NAIRU Estimates for Germany: New Evidence on the Inflation–Unemployment Tradeoff," German Economic Review, Verein für Socialpolitik, vol. 17(1), pages 104-125, February.
    4. Laurence Ball & Sandeep Mazumder, 2011. "Inflation Dynamics and the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 337-405.
    5. 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.
    6. 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.
    7. Bratsiotis, George J. & Robinson, Wayne A., 2016. "Unit Total Costs: An Alternative Marginal Cost Proxy for Inflation Dynamics," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 1826-1849.
    8. repec:kap:empiri:v:44:y:2017:i:2:d:10.1007_s10663-016-9322-x is not listed on IDEAS
    9. Kajuth, Florian, 2012. "Identifying the Phillips curve through shifts in volatility," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 975-991.
    10. repec:ebl:ecbull:eb-16-00665 is not listed on IDEAS
    11. Malikane, Christopher, 2014. "A new Keynesian triangle Phillips curve," Economic Modelling, Elsevier, vol. 43(C), pages 247-255.
    12. Kim, Bae-Geun, 2017. "Does the New Keynesian Phillips curve need countercyclical markups?," Economic Modelling, Elsevier, vol. 63(C), pages 262-282.
    13. Mazumder, Sandeep, 2011. "Cost-based Phillips Curve forecasts of inflation," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 553-567.
    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.
    15. Jaromir Baxa & Miroslav Plasil & Borek Vasicek, 2013. "Inflation and the Steeplechase Between Economic Activity Variables," Working Papers 2013/15, Czech National Bank, Research Department.
    16. Robert G. Murphy, 2016. "Why Has Inflation Been So Unresponsive to Economic Activity in Recent Years?," Boston College Working Papers in Economics 920, Boston College Department of Economics.
    17. 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.
    18. repec:jed:journl:v:42:y:2017:i:3:p:41-60 is not listed on IDEAS
    19. Malikane, Christopher, 2012. "The microfoundations of the Keynesian wage-price spiral," MPRA Paper 42921, University Library of Munich, Germany, revised 29 Nov 2012.
    20. 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.
    21. Robert Murphy, 2016. "Explaining the Recent Behavior of Inflation in the United States," EcoMod2016 9550, EcoMod.
    22. Malikane, Christopher, 2014. "Traditional Inflation Dynamics," MPRA Paper 61427, University Library of Munich, Germany.
    23. repec:bpj:bejmac:v:17:y:2017:i:1:p:42:n:3 is not listed on IDEAS

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