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Inflation Dynamics and Real Marginal Costs: New Evidence from U.S. Manufacturing Industries

  • Ivan Petrella

    (Catholic University of Leuven)

  • Emiliano Santoro

    (Catholic University of Milan)

This paper deals with the analysis of price-setting in U.S. manufacturing industries. Recent studies have heavily criticized the ability of the New Keynesian Phillips curve (NKPC) to fit aggregate inflation [see, e.g., Rudd and Whelan, 2006, Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics, American Economic Review, vol. 96(1), pp. 303-320 ]. We challenge this evidence, showing that forward-looking behavior as implied by the New Keynesian model of price-setting is widely supported at the sectoral level. In fact, current and expected future values of the income share of intermediate goods emerge as an effective driver of in?ation dynamics. Unlike alternative proxies for the forcing variable, the cost of intermediate goods presents dynamic properties in line with the predictions of the New Keynesian theory.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 11-32.

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Length: 43 pages
Date of creation: 28 Dec 2011
Date of revision:
Handle: RePEc:kud:kuiedp:1132
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