Estimating the New Keynesian Phillips curve: a vertical production chain approach

Adam Shapiro

No 06-11, Working Papers from Federal Reserve Bank of Boston

Abstract: It has become customary to estimate the New Keynesian Phillips Curve (NKPC) with GMM using a large instrument set that includes lags of variables that are ad hoc to the model. Researchers have also conventionally used real unit labor cost (RULC) as the proxy for real marginal cost, even though it is difficult to support its significance. This paper introduces a new proxy for the real marginal cost term as well as a new instrument set, both of which are based on the micro foundations of the vertical chain of production. I find that the new proxy, based on input prices as opposed to wages, provides a more robust and significant fit to the model. Instruments that are based on the vertical chain of production appear to be both more valid and relevant towards the model.

Keywords: Phillips curve; Keynesian economics (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (8)

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Journal Article: Estimating the New Keynesian Phillips Curve: A Vertical Production Chain Approach (2008)
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