Discussion paper

DP17875 A Nominal Demand-Augmented Phillips Curve: Theory and Evidence

I show that state-dependent menu cost pricing models give rise to a nominal demand-augmented Phillips curve (NDPC), which adds nominal demand as a second determinant to a standard New Keynesian Phillips curves (NKPC). According to the NDPC, inflation increases if either real marginal costs (gaps) increase [moving along the NKPC] or if nominal demand increases [shifting the NKPC]. A large increase in inflation can thus be consistent with negligible movements in the unemployment rate if the nominal demand impulse is sufficiently strong to induce a large shift of the Phillips curve. From an empirical NKPC perspective, nominal demand maps into endogenous cost-push shocks, but does not imply a non-linear Phillips curve.
I estimate the NDPC using cross-sectional data for U.S. states. Consistent with the theory, my estimates confirm that both nominal demand and marginal costs are significant determinants of inflation. In contrast to a large body of time series literature, the dependence of inflation on its past values is small and insignificant.


Hagedorn, M (2023), “DP17875 A Nominal Demand-Augmented Phillips Curve: Theory and Evidence”, CEPR Press Discussion Paper No. 17875. https://cepr.org/publications/dp17875