A Nominal Demand Augmented Phillips Curve
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A Nominal Demand-augmented Phillips Curve
Author | : Marcus Hagedorn |
Publisher | : |
Total Pages | : 0 |
Release | : 2023 |
Genre | : Inflation (Finance) |
ISBN | : |
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I show that state-dependent menu cost pricing models give rise to a nominal demand-augmented Phillips curve (NDPC), which adds nominal demand as a second determinant to a standard New Keynesian Phillips curves (NKPC). According to the NDPC, inflation increases if either real marginal costs (gaps) increase [moving along the NKPC] or if nominal demand increases [shifting the NKPC]. A large increase in inflation can thus be consistent with negligible movements in the unemployment rate if the nominal demand impulse is sufficiently strong to induce a large shift of the Phillips curve. From an empirical NKPC perspective, nominal demand maps into endogenous cost-push shocks, but does not imply a non-linear Phillips curve. I estimate the NDPC using cross-sectional data for U.S. states. Consistent with the theory, my estimates confirm that both nominal demand and marginal costs are significant determinants of inflation. In contrast to a large body of time series literature, the dependence of inflation on its past values is small and insignificant.
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