Inflation dynamics: A structural econometric analysis

Jordi Galí, Mark Gertler

    Research output: Contribution to journalArticle

    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 cost 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.

    Original languageEnglish (US)
    Pages (from-to)195-222
    Number of pages28
    JournalJournal of Monetary Economics
    Volume44
    Issue number2
    DOIs
    StatePublished - Oct 1999

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    Keywords

    • Inflation
    • Phillips curve
    • Real marginal cost

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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