Abstract

Recent studies have argued that the New Keynesian Phillips curve (Calvo pricing model) is empirically valid, provided that real marginal cost rather than detrended output is used as the variable driving inflation. One interpretation of this result is that real marginal cost is not closely related to the output gap, and so models for monetary policy need to include labormarket rigidities. An alternative interpretation is that marginal cost and the output gap are closely related, but that the latter needs to be measured in a manner consistent with dynamic general equilibrium models. To date, there has been little econometric investigation of this alternative interpretation. This paper provides estimates of the New Keynesian Phillips curve for the U.S., the U.K., and Australia using theory-consistent estimates of the output gap. Using this theory to measure the output gap leads to a considerable improvement in the empirical performance of output-gapbased Phillips curves.

pdf

Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 1019-1045
Launched on MUSE
2006-01-26
Open Access
No
Archive Status
Archived 2007
Back To Top

This website uses cookies to ensure you get the best experience on our website. Without cookies your experience may not be seamless.