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Introduction Among the central issues in macroeconomics is the nature of short run inflation dynamics. This matter is also one of the most fiercely debated, with few definitive answers available after decades of investigation. At stake, among other things, is the nature of business cycles and what should be the appropriate conduct of monetary policy. In response to this challenge, important advances have emerged recently in the theoretical modeling of inflation dynamics. This new literature…
Our results suggest that, conditional on the path of real marginal costs, the baseline new Phillips curve with forward looking behavior may provide a reasonably good description of inflation dynamics. When tested explicitly against an alternative that allows for a fraction of price setters to be backward looking, the structural estimates suggest that this fraction, while statistically significant, is not quantitatively important. One qualification, however, is that there is some imprecision in our estimates of…
We first describe our econometric specification of the new Phillips curve, along with our general estimation procedure. We then present both reduced form and structural estimates of the model. 3.1 Econometric Specification We begin by describing how we obtain a measure of real marginal cost. For simplicity, we restrict ourselves to the simplest measure of marginal cost available, one based on the assumption of a Cobb-Douglas technology. Let At denote technology, Kt capital, and Nt…