Inflation dynamics, marginal cost, and the output gap: evidence from three countries

Katharine Neiss () and Edward Nelson

Proceedings, 2002, issue Mar

Abstract: Recent studies by Gal and Gertler (1999), Gal, Gertler, and Lpez-Salido (GGL) (2001a, 2001b), and Sbordone (1998, 2001) have argued that the New Keynesian Phillips curve (Calvo pricing model) is empirically valid, provided that real marginal cost rather than detrended output is used as the variable driving inflation. GGL (2001a) conclude that real marginal cost is not closely related to the output gap, and that models for monetary policy therefore need to include labor market rigidities. An alternative interpretation is that marginal cost and the output gap are closely related, but that the latter needs to be measured in a manner consistent with dynamic general equilibrium models. To date, there has been little econometric investigation of this alternative interpretation. This paper provides estimates of the New Keynesian Phillips curve for the United States, the United Kingdom, and Australia using theory-based estimates of the output gap. We find little support for the notion that labor costs explain inflation dynamics better than the output gap, and so conclude that modeling of labor market rigidities is not a high priority in analyzing inflation.

Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (82)

Downloads: (external link)
https://www.frbsf.org/wp-content/uploads/nkpcnn.pdf Full Text (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfpr:y:2002:i:mar:x:5

Ordering information: This journal article can be ordered from

Access Statistics for this article

More articles in Proceedings from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library ().