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The Overlooked Assumption Behind the New Keynesian Phillips Curve

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  • Belanger, Gilles

Abstract

The New Keynesian Phillips Curve rests on an assumption not mentioned in the literature. Specifically, firms that are price constrained align their production along the demand curve, ignoring the effects of marginal cost on supply. This paper investigates what happens when the relationship between marginal cost and pricing conforms instead to standard microeconomic theory. It shows that the New Keynesian Phillips Curve is invalid and prices are not procyclical, but acyclical in this case. Therefore, if the assumption in question is necessary to the model, it should be acknowledged for the sake of transparency.

Suggested Citation

  • Belanger, Gilles, 2014. "The Overlooked Assumption Behind the New Keynesian Phillips Curve," MPRA Paper 55629, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:55629
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    File URL: https://mpra.ub.uni-muenchen.de/57813/3/MPRA_paper_57813.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    New Keynesian Phillips Curve; micro-foundations; price rigidity; marginal cost.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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