Inflation Dynamics and Real Marginal Costs: New Evidence from U.S. Manufacturing Industries
University of London - School of Business, Economics and Informatics
University of Copenhagen - Department of Economics
December 28, 2011
Univ. of Copenhagen Dept. of Economics Discussion Paper No. 11-32
This paper deals with the analysis of price-setting in U.S. manufacturing industries. Recent studies have heavily criticized the ability of the New Keynesian Phillips curve (NKPC) to fit aggregate inflation [see, e.g., Rudd and Whelan, 2006, Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics, American Economic Review, vol. 96(1), pp. 303-320 ]. We challenge this evidence, showing that forward-looking behavior as implied by the New Keynesian model of price-setting is widely supported at the sectoral level. In fact, current and expected future values of the income share of intermediate goods emerge as an effective driver of ination dynamics. Unlike alternative proxies for the forcing variable, the cost of intermediate goods presents dynamic properties in line with the predictions of the New Keynesian theory.
Number of Pages in PDF File: 43
Keywords: New Keynesian Phillips Curve, Aggregation, Sectoral Data, Intermediate Goods
JEL Classification: E31, L60working papers series
Date posted: January 27, 2012
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