Inflation Dynamics and Real Marginal Costs: New Evidence from U.S. Manufacturing Industries

Ivan Petrella and Emiliano Santoro

No 1202, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: This paper deals with the analysis of price-setting in U.S. manufacturing industries. Recent studies have heavily criticized the ability of the New Keynesian Phillips curve (NKPC) to fit aggregate inflation [see, e.g., Rudd and Whelan, 2006, Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?, American Economic Review, vol. 96(1), pp. 303-320]. We challenge this evidence, showing that forward-looking behaviour as implied by the New Keynesian model of price-setting is widely supported at the sectoral level. In fact, current and expected future values of the income share of intermediate goods emerge as an effective driver of inflation dynamics. Unlike alternative proxies for the forcing variable, the cost of intermediate goods presents dynamic properties in line with the predictions of the New Keynesian theory.

Keywords: New Keynesian Phillips Curve; Aggregation; Sectoral Data; Intermediate Goods (search for similar items in EconPapers)
JEL-codes: E31 L60 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (16)

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https://eprints.bbk.ac.uk/id/eprint/5957 First version, 2012 (application/pdf)

Related works:
Journal Article: Inflation dynamics and real marginal costs: New evidence from U.S. manufacturing industries (2012)
Working Paper: Inflation dynamics and real marginal costs: new evidence from U.S. manufacturing industries (2011)
Working Paper: Inflation Dynamics and Real Marginal Costs: New Evidence from U.S. Manufacturing Industries (2011)
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