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Inflation dynamics: A structural econometric analysis
Galí, Jordi; Gertler, Mark
Universitat Pompeu Fabra. Departament d'Economia i Empresa
We develop and estimate a structural model of inflation that allowsfor a fraction of firms that use a backward looking rule to setprices. The model nests the purely forward looking New KeynesianPhillips curve as a particular case. We use measures of marginalcosts as the relevant determinant of inflation, as the theorysuggests, instead of an ad-hoc output gap. Real marginal costsare a significant and quantitatively important determinant ofinflation. Backward looking price setting, while statisticallysignificant, is not quantitatively important. Thus, we concludethat the New Keynesian Phillips curve provides a good firstapproximation to the dynamics of inflation.
Macroeconomics and International Economics
new keynesian models
phillips curve
sticky prices
inflation persistence
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