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European Inflation and the New Keynesian Phillips Curve
Author(s) -
Mazumder Sandeep
Publication year - 2012
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-2011.149
Subject(s) - phillips curve , economics , proxy (statistics) , marginal cost , new keynesian economics , inflation (cosmology) , keynesian economics , econometrics , macroeconomics , microeconomics , monetary policy , physics , machine learning , theoretical physics , computer science
The majority of macroeconomists who have studied inflation dynamics in Europe argue that the New Keynesian Phillips Curve (NKPC) provides a good way to describe changes in the price level from the 1970 on. However the vast majority of these articles estimate the NKPC using the labor income share as the proxy for real marginal cost. This article argues that the labor share cannot serve as a proxy for real marginal cost because of its countercyclicality and the lack of labor adjustment costs. Once we account for labor adjustment costs, we are able to derive a new marginal cost proxy that is indeed procyclical; however, we find that the NKPC fails to produce coefficients consistent with its underlying structural parameters when a procyclical marginal cost proxy is used. This casts serious doubt whether the NKPC is empirically applicable to Europe or, for that matter, any other country.