Aggregating Phillips Curves

62 Pages Posted: 21 Feb 2007

See all articles by Jean M. Imbs

Jean M. Imbs

Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute

Florian Pelgrin

EDHEC Business School; EDHEC Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 2007

Abstract

The New Keynesian Phillips Curve is at the center of two raging empirical debates. First, how can purely forward looking pricing account for the observed persistence in aggregate inflation. Second, price-setting responds to movements in marginal costs, which should therefore be the driving force to observed inflation dynamics. This is not always the case in typical estimations. In this paper, we show how heterogeneity in pricing behavior is relevant to both questions. We detail the conditions under which imposing homogeneity results in overestimating a backward-looking component in (aggregate) inflation, and underestimating the importance of (aggregate) marginal costs for (aggregate) inflation. We provide intuition for the direction of these biases, and verify them in French data with information on prices and marginal costs at the industry level. We show that the apparent discrepancy in the estimated duration of nominal rigidities, as implied from aggregate or microeconomic data, can be fully attributable to a heterogeneity bias.

Keywords: New Keynesian Phillips Curve, Heterogeneity, Inflation Persistence, Marginal Costs

JEL Classification: C10, C22, E31, E52

Suggested Citation

Imbs, Jean M. and Jondeau, Eric and Pelgrin, Florian, Aggregating Phillips Curves (July 2007). Swiss Finance Institute Research Paper No. 07-06; ECB Working Paper No. 785. Available at SSRN: https://ssrn.com/abstract=963988

Jean M. Imbs (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://www.hec.unil.ch/ejondeau/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Florian Pelgrin

EDHEC Business School ( email )

France
Switzerland

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

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