Type: Working Paper
Is the New Keynesian Phillips Curve Flat?
Working Paper, ECB Working Paper, 809
STÖLTING, Sarah, KUESTER, Keith, MÜLLER, Gernot J., Is the New Keynesian Phillips Curve Flat?, ECB Working Paper, 809 - https://hdl.handle.net/1814/12194
Retrieved from Cadmus, EUI Research Repository
Macroeconomic data suggest that the New Keynesian Phillips curve is quite flat - despite microeconomic evidence implying frequent price adjustments. While real rigidities may help to account for the conflicting evidence, we propose an alternative explanation: if price markup/cost-push shocks are persistent and negatively correlated with the labor share, the latter being a widely used measure for marginal costs, the estimated pass-through of measured marginal costs into inflation is limited, even if prices are fairly flexible. Using a standard New Keynesian model, we show that the GMM approach to the New Keynesian Phillips curve leads to inconsistent and upward biased estimates if cost-push shocks indeed are persistent. Monte Carlo experiments suggest that the bias is quite sizeable: we find average price durations estimated as high as 12 quarters, when the true value is about 2 quarters. Moreover, alternative estimators appear to be biased as well, while standard diagnostic tests fail to signal a misspecification of the model.
Cadmus permanent link: https://hdl.handle.net/1814/12194
Series/Number: ECB Working Paper; 809
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