The Overlooked Assumption Behind the New Keynesian Phillips Curve

Gilles Bélanger

MPRA Paper from University Library of Munich, Germany

Abstract: The New Keynesian Phillips Curve rests on an assumption not mentioned in the literature. Specifically, firms that are price constrained align their production along the demand curve, ignoring the effects of marginal cost on supply. This paper investigates what happens when the relationship between marginal cost and pricing conforms instead to standard microeconomic theory. It shows that the New Keynesian Phillips Curve is invalid and prices are not procyclical, but acyclical in this case. Therefore, if the assumption in question is necessary to the model, it should be acknowledged for the sake of transparency.

Keywords: New Keynesian Phillips Curve; micro-foundations; price rigidity; marginal cost. (search for similar items in EconPapers)
JEL-codes: D43 E31 (search for similar items in EconPapers)
Date: 2014-04-28
New Economics Papers: this item is included in nep-mac
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https://mpra.ub.uni-muenchen.de/57813/3/MPRA_paper_57813.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:55629

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