Hostname: page-component-cd9895bd7-jkksz Total loading time: 0 Render date: 2024-12-23T07:48:37.593Z Has data issue: false hasContentIssue false
  • English
  • Français

UNIT TOTAL COSTS: AN ALTERNATIVE MARGINAL COST PROXY FOR INFLATION DYNAMICS

Published online by Cambridge University Press:  28 September 2015

George J. Bratsiotis  and
Wayne A. Robinson
George J. Bratsiotis*
Affiliation:
University of Manchester and Centre for Growth and Business Cycle Research (CGBCR)
Wayne A. Robinson
Affiliation:
Bank of Jamaica
*
Address correspondence to: George J. Bratsiotis, Economics, School of Social Sciences, University of Manchester, Manchester M13 9PL, UK; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

The New Keynesian Phillips curve (NKPC) driven by unit labor costs has been criticized for failing to match inflation dynamics and for failing to explain the duration of price contracts. This paper extends recent attempts in the literature to improve the fit of the NKPC, by introducing a fuller marginal cost proxy, unit total costs, that is derived from both labor and nonlabor unit costs; the latter include capital-related costs and production taxes. Borrowing costs are examined separately, as in the cost channel literature. Unit total costs are shown to improve the fit of the short-run variation in inflation and strengthen the empirical support for the role of expectations-based inflation persistence. They also imply a duration of fixed nominal contracts that is closer to those suggested by firm-level surveys. The cost channel becomes relatively less important when unit total costs, rather than unit labor costs, are used as a marginal cost proxy.

Keywords

New Keynesian Phillips CurveInflationPrice RigidityMarginal Cost ProxyProduction CostsBorrowing CostsCost Channel
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 7 , October 2016 , pp. 1826 - 1849
Copyright
Copyright © Cambridge University Press 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Agénor, P.R., Bratsiotis, G.J., and Pfajfar, D. (2014) Credit frictions, collateral and the cyclical behavior of the finance premium. Macroeconomic Dynamics 18 (5), 985–997.Google Scholar
Amarasekara, C. and Bratsiotis, G.J. (2012) Monetary policy and real wage cyclicality. Applied Economics 44 (33), 4391–4408.CrossRefGoogle Scholar
Atta-Mensah, J. and Dib, A. (2008) Bank lending, credit shocks, and the transmission of Canadian monetary policy. International Review of Economics and Finance 17, 159–176.Google Scholar
Bardsen, G., Jansen, E., and Nymoen, R. (2004) Econometric evaluation of the New Keynesian Phillips curve. Oxford Bulletin of Economics and Statistics 66 (Supplement), 671–686.Google Scholar
Barth, M.J. and Ramey, V.A. (2001) The cost channel of monetary transmission. NBER Macroeconomics Annual 16, 199–240.Google Scholar
Bils, M. and Klenow, P. (2004) Some evidence on the importance of sticky prices. Journal of Political Economy 112, 947–985.CrossRefGoogle Scholar
Bjørnland, H. C., Leitemo, K. and Maih, J. (2009) Estimating the Natural Rates in a Simple New Keynesian Framework. Norges Bank working paper 2007/10.Google Scholar
Blake, D. (1991) The estimation of rational expectations models: A survey. Journal of Economic Studies 18, 31–70.CrossRefGoogle Scholar
Blinder, A. (1994) On sticky prices: Academic theories meet the real world. In Mankiw, N. G. (ed.), Monetary Policy. Chicago: University of Chicago Press.Google Scholar
Blinder, A., Canetti, E., Lebow, D., and Rudd, J. (1998) Asking about Prices: A New Approach to Understanding Price Stickiness. New York: Russell Sage Foundation.Google Scholar
Buiter, W. and Jewitt, I. (1989) Staggered wage setting with real wage relativities: Variations on a theme of Taylor. In Buiter, W. (ed.), Macroeconomic Theory and Stabilization Policy, pp. 183–199. Ann Arbor: University of Michigan Press.Google Scholar
Cantore, C., Levine, P., and Yang, B. (2010) CES Technology and Business Cycle Fluctuations. Working paper, University of Surrey.Google Scholar
Chadha, J.S. and Nolan, C. (2004) Output, inflation and the New Keynesian Phillips curve. International Review of Applied Economics 18 (3), 271–287.Google Scholar
Chevalier, J., Kashyap, A., and Rossi, P. (2003) Why don't prices rise during periods of peak demand? Evidence from scanner data. American Economic Review 93, 15–37.Google Scholar
Chowdhury, I., Hoffmann, M., and Schabert, A. (2006) Inflation dynamics and the cost channel of monetary transmission. European Economic Review 50, 995–1016.CrossRefGoogle Scholar
Coenen, G., Levin, A.T., and Kai, C. (2007) Identifying the influences of nominal and real rigidities in aggregate price-setting behavior. Journal of Monetary Economics 54 (8), 2439–2466.Google Scholar
Cook, D. 1999. The liquidity effect and money demand. Journal of Monetary Economics 43, 377–390.Google Scholar
Davidson, R. and MacKinnon, J. (1981) Several tests for model specification in the presence of alternative hypotheses. Econometrica 49 (3), 781–793.Google Scholar
De Walque, G., Smets, F., and Wouters, R. (2004) Price Setting in General Equilibrium: Alternative Specifications. Mimeo, National Bank of Belgium.Google Scholar
Fuhrer, J. (2006) Intrinsic and inherited inflation persistence. International Journal of Central Banking 3 (2), 49–86.Google Scholar
Fuhrer, J. and Moore, G. (1995) Inflation persistence. Quarterly Journal of Economics 110, 127–159.CrossRefGoogle Scholar
Gagnon, E. and Khan, H. (2005) New Phillips curve under alternative production technologies for Canada, the United States and the Euro area. European Economic Review 49, 1571–1602.Google Scholar
Gali, J. and Gertler, M. (1999) Inflation dynamics: A structural econometric analysis. Journal of Monetary Economics 44 (2), 195–258.Google Scholar
Gali, J., Gertler, M., and Lopez-Salido, J.D. (2001) European inflation dynamics. European Economic Review 45, 1237–1270.Google Scholar
Gali, J., Gertler, M., and Lopez-Salido, J.D. (2005) Robustness of the estimates of the hybrid New Keynesian Phillips curve. Journal of Monetary Economics 52 (2), 1107–1118.Google Scholar
Gali, J., Gertler, M., and Lopez-Salido, J.D. (2007) Markups, gaps and the welfare costs of business fluctuations. Review of Economics and Statistics 89, 44–59.Google Scholar
Godfrey, L.G. (1983) Testing non-nested models after estimation by instrumental variables or least squares. Econometrica 51 (2), 355–365.Google Scholar
Goodfriend, M. and McCallum, B.T. (2007) Banking and interest rates in monetary policy analysis: A quantitative exploration. Journal of Monetary Economics 54, 1480–1507.Google Scholar
Gwin, C.R. and VanHoose, D.D. (2007) Disaggregate evidence on price stickiness and implications for macro models. Economic Inquiry, Western Economic Association International 46 (4) 561–575.Google Scholar
Gwin, C.R. and VanHoose, D.D. (2008) Alternative measures of marginal cost and inflation in estimations of new Keynesian inflation dynamics. Journal of Macroeconomics 30 (3), 928–940.Google Scholar
Hall, S., Walsh, M., and Yates, T. (2000) Are UK companies' prices sticky? Oxford Economic Papers 52, 425–446.Google Scholar
Hnatkovska, V., Lahiri, A., and Vegh, C.A. (2008) Interest Rates and the Exchange Rate: A Non-monotonic Tale. NBER working pPaper W13925.CrossRefGoogle Scholar
Kleibergen, K. and Mavroeidis, S. (2009) Weak instrument robust tests in GMM and the New Keynesian Phillips curve. Journal of Business and Economic Statistics 27 (3), 293–311.Google Scholar
Lawless, M. and Whelan, K. (2007) Understanding the Dynamics of Labour Shares and Inflation. Working papers series 784, European Central Bank.Google Scholar
Lindé, J. (2005) Estimating New Keynesian Phillips curve: A full information maximum likelihood approach. Journal of Monetary Economics 52 (6), 1135–1149.Google Scholar
Lubik, T.A. and Teo, W.L. (2012) Inventories, inflation dynamics and the New Keynesian Phillips curve. European Economic Review 56 (3), 327–346.Google Scholar
Matheron, J. and Maury, T. (2004) Supply-side refinements and the New Keynesian Phillips curve. Economic Letters 82, 391–396.Google Scholar
Mavroeidis, S. (2005) Identification issues in forward-looking models estimated by GMM with an application to the Phillips curve. Journal of Money, Credit and Banking 37 (3), 421–449.Google Scholar
Mazumder, S. (2010) The New Keynesian Phillips curve and the cyclicality of marginal cost. Journal of Macroeconomics 32 (3), 747–765.CrossRefGoogle Scholar
McAdam, P. and Willman, A. (2011) Technology, Utilization and Inflation: What Drives the New Keynesian Phillips Curve? Working paper series 1369, European Central Bank.Google Scholar
Mehra, Y. (1993) Unit labor costs and the price level. Economic Quarterly Federal Reserve Bank of Richmond 79 (4), 35–51.Google Scholar
Nason, J.M. and Smith, G.W. (2008) Identifying the New Keynesian Phillips curve. Journal of Applied Econometrics 23 (5), 525–551.Google Scholar
Neiss, K.S. and Nelson, E. (2005) Inflation dynamics, marginal cost, and the output gap: Evidence from three countries. Journal of Money, Credit and Banking 37 (6), 1019–1045.Google Scholar
Ravenna, F. and Walsh, C.E. (2006) Optimal monetary policy with the cost channel. Journal of Monetary Economics 53, 199–216.Google Scholar
Roberts, J.M. (2006) Monetary policy and inflation dynamics. International Journal of Central Banking 2 (3), 193–230.Google Scholar
Rotemberg, J. and Woodford, M. (1997) An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy. NBER technical working paper T233.Google Scholar
Rotemberg, J. and Woodford, M. (1999) The Cyclical Behaviour of Prices and Costs. NBER working paper 6909Google Scholar
Rudd, J. and Whelan, K. (2002) Does labour income share drive inflation. Finance and Economics Discussion Series. (30).Google Scholar
Rudd, J. and Whelan, K. (2005) New tests of the New-Keynesian Phillips curve. Journal of Monetary Economics 52 (6), 1167–1181.CrossRefGoogle Scholar
Rudd, J. and Whelan, K. (2007) Modelling inflation dynamics a critical review of the research. Journal of Money, Credit and Banking 39, 155–170.Google Scholar
Sbordone, A. (2002) Prices and unit labor costs: A new test of price stickiness. Journal of Monetary Economics 49 (2), 265–292.Google Scholar
Sbordone, A. (2005) Do expected future marginal cost drive inflation dynamics. Journal of Monetary Economics 52 (6), 1183–1197.Google Scholar
Staiger, J. and Stock, J. (1987) Instrumental variables regression with weak instruments. Econometrica 65 (3), 557–586.Google Scholar
Stock, J. and Watson, M. (2007) Why has US inflation become harder to forecast. Journal of Money, Credit and Banking 39, 3–33.CrossRefGoogle Scholar
Wolman, A. (1999) Sticky prices, marginal cost, and the behavior of inflation. Federal Reserve Bank of Richmond Economic Quarterly 85, 29–48.Google Scholar
Zhang, C., Osborn, D. R. and Kim, D.H. (2008) The New Keynesian Phillips curve: From sticky inflation to sticky prices. Journal of Money, Credit and Banking 40 (4), 667–699.CrossRefGoogle Scholar