Aggregating Phillips Curves

Jean Imbs, Eric Jondeau and Florian Pelgrin
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Florian Pelgrin: University of Lausanne, HEC and CIRANO

No 07-06, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The New Keynesian Phillips Curve is at the center of two raging empirical debates. First,vhow can purely forward looking pricing account for the observed persistence in aggregate inflation. Second, price-setting responds to movements in marginal costs, which should therefore be the driving force to observed inflation dynamics. This is not always the case in typical estimations. In this paper, we show how heterogeneity in pricing behavior is relevant to both questions. We detail the conditions under which imposing homogeneityresults in overestimating a backward-looking component in (aggregate) inflation, and underestimating the importance of (aggregate) marginal costs for (aggregate) inflation. We provide intuition for the direction of these biases, and verify them in French data with information on prices and marginal costs at the industry level. We show that the apparent discrepancy in the estimated duration of nominal rigidities, as implied from aggregate or microeconomic data, can be fully attributable to a heterogeneity bias.

Keywords: New Keynesian Phillips Curve; Heterogeneity; Inflation Persistence; Marginal Costs. (search for similar items in EconPapers)
JEL-codes: C10 C22 E31 E52 (search for similar items in EconPapers)
Pages: pages
Date: 2007-02
New Economics Papers: this item is included in nep-cba and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (26)

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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=963988 (application/pdf)

Related works:
Working Paper: Aggregating Phillips Curves (2007)
Working Paper: Aggregating Phillips curves (2007)
Working Paper: Aggregating Phillips curves (2006)
Working Paper: Aggregating Phillips Curves (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0706

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