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Technology, Utilization and Inflation: What Drives the New Keynesian Phillips Curve?

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  • Peter McAdam

    (University of Surrey and European Central Bank)

  • Alpo Willman

    (European Central Bank)

Abstract

We argue that the New-Keynesian Phillips Curve literature has failed to deliver a convincing measure of real marginal costs. We start from a careful modeling of optimal price setting allowing for non-unitary factor substitution, non-neutral technical change and time-varying factor utilization rates. This ensures the resulting real marginal cost measures match volatility reductions and level changes witnessed in many US time series. The cost measure comprises conventional counter-cyclical cost elements plus pro-cyclical (and co-varying) utilization rates. Although pro-cyclical elements seem to dominate, the components of real marginal cost components are becoming less cyclical over time. Incorporating this richer driving variable produces more plausible price-stickiness estimates than otherwise and suggests a more balanced weight of backward and forward-looking inflation expectations than commonly found. Our results challenge existing views of inflation determinants and have important implications for modeling inflation in New-Keynesian models.

Suggested Citation

  • Peter McAdam & Alpo Willman, 2012. "Technology, Utilization and Inflation: What Drives the New Keynesian Phillips Curve?," School of Economics Discussion Papers 0912, School of Economics, University of Surrey.
  • Handle: RePEc:sur:surrec:0912
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    Cited by:

    1. Milda Norkute, 2015. "Can the sectoral New Keynesian Phillips curve explain inflation dynamics in the Euro Area?," Empirical Economics, Springer, vol. 49(4), pages 1191-1216, December.
    2. Jakub Growiec & Jakub Muck, 2015. "Isoelastic Elasticity of Substitution Production Functions," Discussion Papers 15-13, University of Copenhagen. Department of Economics.
    3. Kalin Nikolov & Alexander Popov, 2014. "The sovereign-bank nexus," Research Bulletin, European Central Bank, vol. 20, pages 2-4.
    4. Willman, Alpo & Dieppe, Alistair & Baumann, Ursel & González Pandiella, Alberto, 2014. "Model of the United States economy with learning MUSEL," Working Paper Series 1745, European Central Bank.
    5. Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799, December.
    6. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-188, March.
    7. Marek Jarociński & Bartosz Maćkowiak, 2014. "Choosing variables in macroeconomic modelling," Research Bulletin, European Central Bank, vol. 20, pages 5-8.
    8. PETER McADAM & ALPO WILLMAN, 2013. "Technology, Utilization, and Inflation: What Drives the New Keynesian Phillips Curve?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(8), pages 1547-1579, December.
    9. Christopher J. Nekarda & Valerie A. Ramey, 2013. "The Cyclical Behavior of the Price-Cost Markup," NBER Working Papers 19099, National Bureau of Economic Research, Inc.
    10. Bratsiotis, George J. & Robinson, Wayne A., 2016. "Unit Total Costs: An Alternative Marginal Cost Proxy for Inflation Dynamics," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 1826-1849.
    11. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.
    12. Elena Angelini & Michele Ca' Zorzi, 2014. "External and macroeconomic adjustment in Spain and Germany," Research Bulletin, European Central Bank, vol. 20, pages 9-12.

    More about this item

    Keywords

    Inflation; Real Marginal Costs; Production Function; Labor Share; Cyclicality; Utilization; Intensive Labor; Overtime Premia;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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