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

Peter McAdam () and Alpo Willman

Journal of Money, Credit and Banking, 2013, vol. 45, issue 8, 1547-1579

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 nonunitary factor substitution, nonneutral 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 U.S. time series. The cost measure comprises conventional countercyclical cost elements plus procyclical (and covarying) utilization rates. Although procyclical 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.

Date: 2013
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https://doi.org/10.1111/jmcb.12062

Related works:
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? (2012)
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:wly:jmoncb:v:45:y:2013:i:8:p:1547-1579

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