Is the New Keynesian Phillips Curve Flat?

35 Pages Posted: 19 Sep 2007

See all articles by Keith Kuester

Keith Kuester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Gernot J. Müller

University of Tuebingen - Department of Economics

Sarah Stölting

European University Institute

Date Written: September 2007

Abstract

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.

Keywords: Price Rigidities, New Keynesian Phillips Curve, Cost-push shocks, GMM estimation

JEL Classification: E31, E32, C22

Suggested Citation

Kuester, Keith and Müller, Gernot J. and Stölting, Sarah, Is the New Keynesian Phillips Curve Flat? (September 2007). ECB Working Paper No. 809, Available at SSRN: https://ssrn.com/abstract=1009119

Keith Kuester (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

Sarah Stölting

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

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