Department of Economics and Business - Universitat Pompeu Fabra

Title:: Inflation dynamics: A structural econometric analysis
Authors:: Jordi Galí and Mark Gertler
Date:: August 1998
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 marginal costs 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.
Keywords:: New Keynesian models, Phillips curve, sticky prices, inflation persistence
JEL codes:: E32
Area of Research:: Macroeconomics and International Economics
Published in:: Journal of Monetary Economics, vol. 44, nº 2, 195-222, 1999

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