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Inflation Dynamics: A Structural Econometric Analysis

  • Jordi Gali
  • Mark Gertler

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7551.

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Date of creation: Feb 2000
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Publication status: published as Journal of Monetary Economics, Vol. 44, no. 2 (1999): 195-222.
Handle: RePEc:nbr:nberwo:7551
Note: EFG ME
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