Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153803
Authors: 
McAdam, Peter
Willman, Alpo
Year of Publication: 
2011
Series/Report no.: 
ECB Working Paper 1369
Abstract: 
We argue that the New-Keynesian Phillips Curve literature has failed to deliver a convincing measure of “fundamental inflation”. We start from a careful modeling of optimal price setting allowing for non-unitary factor substitution, non-neutral technical change and timevarying factor utilization rates. This ensures the resulting real marginal cost measures match volatility reductions and level changes witnessed in many US time series. The cost measure comprises conventional counter-cyclical cost elements plus pro-cyclical (and co-varying) utilization rates. Although pro-cyclical elements dominate, real marginal costs are becoming less cyclical over time. Incorporating this richer driving variable produces more plausible price-stickiness estimates than otherwise and suggests a more balanced weight of backward and forward-looking inflation expectations than commonly found. Our results challenge existing views of inflation determinants and have important implications for modeling inflation in New-Keynesian models.
Subjects: 
cyclicality
inflation
intensive labor
Labor Share
overtime premia
production function
real marginal costs
utilization
JEL: 
E20
E30
Document Type: 
Working Paper

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