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Inflation and marginal cost: on the importance of their covariance

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  • Sandeep Mazumder

Abstract

Many researchers have found that estimating the New Keynesian Phillips Curve (NKPC) using the output gap to proxy for real marginal cost tends to produce a counter-intuitive coefficient sign in the model, whereas using the labour income share produces the expected coefficient sign. This article investigates the potential cause of this puzzle: What causes these differing signs for the coefficient for real marginal cost? We find that this coefficient sign crucially depends on the covariance between inflation and marginal cost. Moreover, this covariance in turn critically depends on the cyclicality of the marginal cost proxy that is used.

Suggested Citation

  • Sandeep Mazumder, 2011. "Inflation and marginal cost: on the importance of their covariance," Applied Economics Letters, Taylor & Francis Journals, vol. 18(11), pages 1083-1089.
  • Handle: RePEc:taf:apeclt:v:18:y:2011:i:11:p:1083-1089
    DOI: 10.1080/13504851.2010.524608
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    Cited by:

    1. Baxa, Jaromír & Plašil, Miroslav & Vašíček, Bořek, 2015. "Changes in inflation dynamics under inflation targeting? Evidence from Central European countries," Economic Modelling, Elsevier, vol. 44(C), pages 116-130.
    2. repec:exl:25engi:v:27:y:2016:i:3:p:276-284 is not listed on IDEAS
    3. 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.

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