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New Phillips Curve with Alternative Marginal Cost Measures forCanada, the United States, and the Euro Area

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  • Edith Gagnon
  • Hashmat Khan

Abstract

Recent research on the new Phillips curve (NPC) (e.g., Galí, Gertler, and López-Salido 2001a) gives marginal cost an important role in capturing pressures on inflation. In this paper we assess the case for using alternative measures of marginal cost to improve the empirical fit of the NPC. Following Sbordone (2000), we derive the aggregation factors when firms use Cobb-Douglas with overhead labour and constant elasticity of substitution (CES) technologies. We estimate the NPC for Canada, the United States, and the euro area. Our structural results indicate that: (i) ignoring aggregation factors gives implausibly large estimates of the duration of price stickiness—in this respect, the aggregation factors improve the fit of the NPC substantially; (ii) the marginal cost measures based on CES technology improve the fit of the NPC relative to the Cobb-Douglas technology, particularly for Canada and the euro area; (iii) for Canada, the backward-looking component of inflation is quite strong relative to the United States and the euro area; and (iv) the incorporation of open-economy considerations for Canada does not yield better estimates of the NPC.

Suggested Citation

  • Edith Gagnon & Hashmat Khan, 2001. "New Phillips Curve with Alternative Marginal Cost Measures forCanada, the United States, and the Euro Area," Staff Working Papers 01-25, Bank of Canada.
  • Handle: RePEc:bca:bocawp:01-25
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    1. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
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    8. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank.
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    Cited by:

    1. Bakhshi, Hasan & Khan, Hashmat & Rudolf, Barbara, 2007. "The Phillips curve under state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2321-2345, November.
    2. Aurelijus Dabušinskas & Dmitry Kulikov, 2007. "New Keynesian Phillips curve for Estonia, Latvia and Lithuania," Bank of Estonia Working Papers 2007-07, Bank of Estonia, revised 26 Aug 2007.
    3. Paloviita, Maritta & Mayes, David, 2005. "The use of real-time information in Phillips-curve relationships for the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 415-434, December.
    4. Argia M. Sbordone, 2006. "U.S. Wage and Price Dynamics: A Limited-Information Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    5. Hans Genberg & Laurent L. Pauwels, 2003. "An Open Economy New Keynesian Phillips Curve: Evidence from Hong Kong," IHEID Working Papers 03-2003, Economics Section, The Graduate Institute of International Studies.
    6. Alain Guay & Florian Pelgrin, 2004. "The U.S. New Keynesian Phillips Curve: An Empirical Assessment," Staff Working Papers 04-35, Bank of Canada.
    7. Ramdane Djoudad & Céline Gauthier, 2003. "A Small Dynamic Hybrid Model for the Euro Area," Staff Working Papers 03-19, Bank of Canada.
    8. Peter Tillmann, 2009. "The New Keynesian Phillips curve in Europe: does it fit or does it fail?," Empirical Economics, Springer, vol. 37(3), pages 463-473, December.
    9. Eichenbaum, Martin & Fisher, Jonas D.M., 2007. "Estimating the frequency of price re-optimization in Calvo-style models," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2032-2047, October.
    10. Joseph P. Byrne & Aditya S. Chavali & Alexandros Kontonikas., 2010. "Exchange Rate Pass Through To Import Prices: Panel Evidence From Emerging Market Economies," Working Papers 2010_19, Business School - Economics, University of Glasgow.
    11. Maritta Paloviita, 2006. "Inflation Dynamics in the Euro Area and the Role of Expectations," Empirical Economics, Springer, vol. 31(4), pages 847-860, November.
    12. Faith Christian Cacnio, 2013. "Analysing inflation dynamics in the Philippines using the new Keynesian Phililips curve," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 50(2), pages 53-82, December.
    13. Martin S. Eichenbaum & Jonas D. M. Fisher, 2003. "Evaluating the Calvo model of sticky prices," Working Paper Series WP-03-23, Federal Reserve Bank of Chicago.
    14. Katharine Neiss & Edward Nelson, 2002. "Inflation dynamics, marginal cost, and the output gap: evidence from three countries," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    15. Jesús Antonio Bejarano Rojas, 2005. "Estimación estructural y análisis de la curva de Phillips neokeynesiana para Colombia," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 23(48), pages 64-117, Junio.
    16. Jean-Paul Lam & Greg Tkacz, 2004. "Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General Equilibrium Framework," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 89-126, March.
    17. Maritta Paloviita, 2004. "Inflation dynamics in the euro area and the role of expectations," Macroeconomics 0405015, University Library of Munich, Germany.
    18. Lynda Khalaf & Maral Kichian, 2004. "Estimating New Keynesian Phillips Curves Using Exact Methods," Staff Working Papers 04-11, Bank of Canada.
    19. Ieva Rubene & Paolo Guarda, 2004. "The new Keynesian Phillips curve: empirical results for Luxembourg," BCL working papers 11, Central Bank of Luxembourg.
    20. Campbell Leith & Jim Malley, 2007. "A Sectoral Analysis of Price-Setting Behavior in U.S. Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 335-342, May.
    21. Sigal Ribon, 2004. "A New Phillips Curve for Israel," Bank of Israel Working Papers 2004.11, Bank of Israel.
    22. Gabriele Galati & William R. Melick, 2006. "The evolving inflation process: an overview," BIS Working Papers 196, Bank for International Settlements.
    23. Jondeau, Eric & Le Bihan, Herve, 2005. "Testing for the New Keynesian Phillips Curve. Additional international evidence," Economic Modelling, Elsevier, vol. 22(3), pages 521-550, May.
    24. Manuel Ramos-Francia & Alberto Torres García, 2006. "Inflation Dynamics in Mexico: A Characterization Using the New Phillips Curve," Working Papers 2006-15, Banco de México.
    25. Carla Massidda, 2005. "Estimating the New Keynesian Phillips Curve for Italian Manufacturing Sectors," Working Papers 2005.12, Fondazione Eni Enrico Mattei.

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    More about this item

    Keywords

    Economic models; Inflation and prices;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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