Is the New Keynesian Phillips curve flat?

Gernot Müller, Keith Kuester and Sarah Stölting

No 809, Working Paper Series from European Central Bank

Abstract: Macroeconomic data suggest that the New Keynesian Phillips curve is quite flat - despite microeconomic evidence implying frequent price adjustments. While real rigidities may help to account for the conflicting evidence, we propose an alternative explanation: if price markup/cost-push shocks are persistent and negatively correlated with the labor share, the latter being a widely used measure for marginal costs, the estimated pass-through of measured marginal costs into inflation is limited, even if prices are fairly flexible. Using a standard New Keynesian model, we show that the GMM approach to the New Keynesian Phillips curve leads to inconsistent and upward biased estimates if cost-push shocks indeed are persistent. Monte Carlo experiments suggest that the bias is quite sizeable: we find average price durations estimated as high as 12 quarters, when the true value is about 2 quarters. Moreover, alternative estimators appear to be biased as well, while standard diagnostic tests fail to signal a misspecification of the model. JEL Classification: E30, C15

Keywords: cost-push shocks; GMM estimation; new Keynesian Phillips curve; Price Rigidities (search for similar items in EconPapers)
Date: 2007-09
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Citations: View citations in EconPapers (6)

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Journal Article: Is the New Keynesian Phillips curve flat? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2007809

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