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.

Keywords: inflation; New Keynesian pricing; marginal costs;

JEL Classification: E31; E32;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2005-03-01

Number: 204

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.