Inflation dynamics: A structural econometric analysis

Jordi Galí and Mark Gertler

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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 costs 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: New Keynesian models; Phillips curve; sticky prices; inflation persistence (search for similar items in EconPapers)
JEL-codes: E32 (search for similar items in EconPapers)
Date: 1998-08
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (17)

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Related works:
Working Paper: Inflation Dynamics: A Structural Econometric Analysis (2000)
Journal Article: Inflation dynamics: A structural econometric analysis (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:341

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