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Inflation dynamics: A structural econometric analysis

  • Gali, Jordi
  • Gertler, Mark

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 arginal cost 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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 44 (1999)
Issue (Month): 2 (October)
Pages: 195-222

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Handle: RePEc:eee:moneco:v:44:y:1999:i:2:p:195-222
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