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What really drives inflation?

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  • Christopher Malikane
  • Tshepo Mokoka

Abstract

We derive a broad measure of real marginal cost which features the labour share, output gap and supply shock variables. We evaluate the contribution of each of these components of real marginal cost as driving forces for inflation. We find that supply shock variables dominate the output gap and the labour share in driving inflation dynamics. This finding suggests that a more elaborate real marginal cost function should be considered by the new Keynesian literature. Tests of the new Keynesian Phillips curve that are based on the restrictive one-factor production technology should therefore be reconsidered. In the light of this, forecast-based policy rules require more serious study, since they permit more flexibility to respond to supply shocks without generating significant output loss.

Suggested Citation

  • Christopher Malikane & Tshepo Mokoka, 2014. "What really drives inflation?," Applied Economics Letters, Taylor & Francis Journals, vol. 21(3), pages 196-200, February.
    • Handle: RePEc:taf:apeclt:v:21:y:2014:i:3:p:196-200
    DOI: 10.1080/13504851.2013.848017
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    Cited by:

    1. Mutiu Gbade Rasaki, 2017. "A Bayesian Estimation of DSGE Model for the Nigerian Economy," EuroEconomica, Danubius University of Galati, issue 2(36), pages 145-158, November.
    2. Mutiu Gbade Rasaki, 2017. "An Estimated New Keynesian Phillips Curve for Nigeria," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 13(2), pages 203-211, April.

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