Title: The New Keynesian Phillips Curve and the Cyclicality of Marginal Cost
Abstract: Several authors have argued that if the labor share of income is used as the proxy for real marginal cost, then the sticky-price version of the New Keynesian Phillips Curve does a good job of approximating US inflation dynamics. However, this paper argues that the labor share is an inappropriate measure of real marginal cost for two reasons: it is countercyclical whereas theory predicts marginal cost should be procyclical, and it assumes that labor can be costlessly adjusted at a fixed real wage rate. Relaxing this assumption to a more realistic one leads to a measure of marginal cost that is markedly procyclical. Testing this improved measure of marginal cost then produces results that are contradictory to the entire underlying model of the NKPC. Thus I conclude that the NKPC fails to give a sound explanation of inflation dynamics.
Publication Year: 2008
Publication Date: 2008-11-12
Language: en
Type: article
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Cited By Count: 2
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