Technology, Utilization and Inflation: What Drives the New Keynesian Phillips Curve?

Peter McAdam (pmcadamp@googlemail.com) and Alpo Willman

No 912, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: We argue that the New-Keynesian Phillips Curve literature has failed to deliver a convincing measure of real marginal costs. We start from a careful modeling of optimal price setting allowing for non-unitary factor substitution, non-neutral technical change and time-varying factor utilization rates. This ensures the resulting real marginal cost measures match volatility reductions and level changes witnessed in many US time series. The cost measure comprises conventional counter-cyclical cost elements plus pro-cyclical (and co-varying) utilization rates. Although pro-cyclical elements seem to dominate, the components of real marginal cost components are becoming less cyclical over time. Incorporating this richer driving variable produces more plausible price-stickiness estimates than otherwise and suggests a more balanced weight of backward and forward-looking inflation expectations than commonly found. Our results challenge existing views of inflation determinants and have important implications for modeling inflation in New-Keynesian models.

Keywords: Inflation; Real Marginal Costs; Production Function; Labor Share; Cyclicality; Utilization; Intensive Labor; Overtime Premia (search for similar items in EconPapers)
JEL-codes: E20 E30 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2012-08
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Technology, Utilization, and Inflation: What Drives the New Keynesian Phillips Curve? (2013)
Journal Article: Technology, Utilization, and Inflation: What Drives the New Keynesian Phillips Curve? (2013)
Working Paper: Technology, utilization and inflation: what drives the New Keynesian Phillips Curve? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0912

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