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Title: Inflation Dynamics: A Structural Economic Analysis

Author(s): Jordi Galí and Mark Gertler

Publication Date: September 1999

Keyword(s): Inflation, Phillips Curve and Real Marginal Cost

Programme Area(s): International Macroeconomics

Abstract: 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 marginal 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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Bibliographic Reference

Galí, J and Gertler, M. 1999. 'Inflation Dynamics: A Structural Economic Analysis'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2246