Do expected future marginal costs drive inflation dynamics?
Abstract: This article discusses a more general interpretation of the two-step minimum distance estimation procedure proposed in earlier work by Sbordone. The estimator is again applied to a version of the New Keynesian Phillips curve, in which inflation dynamics are driven by the expected evolution of marginal costs. The article clarifies econometric issues, addresses concerns about uncertainty and model misspecification raised in recent studies, and assesses the robustness of previous results. While confirming the importance of forward-looking terms in accounting for inflation dynamics, it suggests how the methodology can be applied to extend the analysis of inflation to a multivariate setting.
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Provider: Federal Reserve Bank of New York
Part of Series: Staff Reports
Publication Date: 2005-03-01
Note: For a published version of this report, see Argia M. Sbordone, "Do Expected Future Marginal Costs Drive Inflation Dynamics?" Journal of Monetary Economics 52, no. 6 (September 2005): 1183-97.