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Firm-Specific Capital and the New Keynesian Phillips Curve

Michael Woodford ()

International Journal of Central Banking, 2005, vol. 1, issue 2

Abstract: A relation between inflation and the path of average marginal cost (often measured by unit labor cost) implied by the Calvo (1983) model of staggered pricing - sometimes referred to as the "New Keynesian" Phillips curve - has been the subject of extensive econometric estimation and testing. Standard theoretical justifications of this form of aggregate-supply relation, however, either assume (1) the existence of a competitive rental market for capital services, so that the shadow cost of capital services is equated across firms and sectors at all points in time, despite the fact that prices are set at different times, or (2) that the capital stock of each firm is constant, or at any rate exogenously given, and so independent of the firm’s pricing decision. But neither assumption is realistic. The present paper examines the extent to which existing empirical specifications and interpretations of parameter estimates are compromised by reliance on either of these assumptions.

JEL-codes: E30 (search for similar items in EconPapers)
Date: 2005
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Related works:
Working Paper: Firm-Specific Capital and the New-Keynesian Phillips Curve (2005) Downloads
Working Paper: Firm-Specific Capital and the New Keynesian Phillips Curve (2005) Downloads
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