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Inflation Dynamics: A Structural Economic Analysis

  • Galí, 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 marginal 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2246.

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Date of creation: Sep 1999
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Handle: RePEc:cpr:ceprdp:2246
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