The New Keynesian Phillips Curve and the Cyclicality of Marginal Cost

Sandeep Mazumder

Economics Working Paper Archive from The Johns Hopkins University,Department of Economics

Abstract: Several authors have argued that if the labor share of income is used as the proxy for real marginal cost, then the sticky-price version of the New Keynesian Phillips Curve does a good job of approximating US inflation dynamics. However, this paper argues that the labor share is an inappropriate measure of real marginal cost for two reasons: it is countercyclical whereas theory predicts marginal cost should be procyclical, and it employs a counterfactual assumption about the behavior of labor over the business cycle. Relaxing this assumption to a more realistic one leads to a measure of marginal cost that is markedly procyclical. Testing this improved measure of marginal cost then produces results that are contradictory to the entire underlying model of the NKPC. Thus I conclude that the NKPC fails to give a sound explanation of inflation dynamics.

Date: 2008-09
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (6)

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Journal Article: The new Keynesian Phillips curve and the cyclicality of marginal cost (2010)
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