Discussion paper

DP2246 Inflation Dynamics: A Structural Economic Analysis

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.

£6.00
Citation

Gertler, M and J Galí (1999), ‘DP2246 Inflation Dynamics: A Structural Economic Analysis‘, CEPR Discussion Paper No. 2246. CEPR Press, Paris & London. https://cepr.org/publications/dp2246