Inflation Dynamics: A Structural Economic Analysis

Jordi Galí and Mark Gertler

No 2246, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop and estimate a structural model of inflation that allows for a fraction of firms that use a backward looking rule to set prices. The model nests the purely forward looking New Keynesian Phillips curve as a particular case. We use measures of marginal cost as the relevant determinant of inflation, as the theory suggests, instead of an ad-hoc output gap. Real marginal costs are a significant and quantitatively important determinant of inflation. Backward looking price setting, while statistically significant, is not quantitatively important. Thus, we conclude that the New Keynesian Phillips curve provides a good first approximation to the dynamics of inflation.

Keywords: Inflation; Phillips Curve; Real Marginal Cost (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Date: 1999-09
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Citations: View citations in EconPapers (1145)

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