Inflation Dynamics: A Structural Econometric Analysis

31 Pages Posted: 5 May 2000 Last revised: 21 Aug 2022

See all articles by Jordi Galí

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2000

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 arginal 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.

Suggested Citation

Gali, Jordi and Gertler, Mark, Inflation Dynamics: A Structural Econometric Analysis (February 2000). NBER Working Paper No. w7551, Available at SSRN: https://ssrn.com/abstract=214974

Jordi Gali (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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