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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

    as
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    3. Lawless, Martina & Whelan, Karl T., 2011. "Understanding the dynamics of labor shares and inflation," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 121-136, June.
    4. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 338-350, August.
    5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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    More about this item

    Keywords

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

    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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