Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/49884
Authors: 
Mazumder, Sandeep
Year of Publication: 
2008
Series/Report no.: 
Working papers // the Johns Hopkins University, Department of Economics 545
Abstract: 
Several authors have argued that if the labor share of income is used as the proxy for real marginal cost, then the sticky-price version of the New Keynesian Phillips Curve does a good job of approximating US inflation dynamics. However, this paper argues that the labor share is an inappropriate measure of real marginal cost for two reasons: it is countercyclical whereas theory predicts marginal cost should be procyclical, and it employs a counterfactual assumption about the behavior of labor over the business cycle. Relaxing this assumption to a more realistic one leads to a measure of marginal cost that is markedly procyclical. Testing this improved measure of marginal cost then produces results that are contradictory to the entire underlying model of the NKPC. Thus I conclude that the NKPC fails to give a sound explanation of inflation dynamics.
JEL: 
E31
Document Type: 
Working Paper

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