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Anatomy of the Phillips Curve: Micro Evidence and Macro Implications

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Listed:
  • Luca Gagliardone
  • Mark Gertler
  • Simone Lenzu
  • Joris Tielens

Abstract

We use a unique high-frequency micro-dataset to estimate the slope of the primitive form of the New Keynesian Phillips curve, which features marginal cost as the relevant real activity variable. Our dataset encompasses product-level prices, costs, and output within the Belgian manufacturing sector over twenty years, recorded at a quarterly frequency. Leveraging the richness of the data, we adopt a “bottom-up” approach that identifies the Phillips curve’s slope by estimating the primitive parameters that govern firms’ pricing behavior, including the degrees of price rigidity and strategic complementarities in price setting. Our estimates indicate a high slope for the marginal cost-based Phillips curve, which contrasts with the low estimates of the conventional unemployment or output gap-based formulations in the literature. We reconcile the difference by showing that, although the pass-through of marginal cost into inflation is substantial, the elasticity of marginal cost in relation to the output gap is low. Furthermore, through an examination of the transmission of oil shocks, we illustrate how the marginal cost-based Phillips curve offers a transparent means of capturing the impact of supply shocks on inflation.

Suggested Citation

  • Luca Gagliardone & Mark Gertler & Simone Lenzu & Joris Tielens, 2023. "Anatomy of the Phillips Curve: Micro Evidence and Macro Implications," NBER Working Papers 31382, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31382
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    References listed on IDEAS

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    1. Fernando Alvarez & Francesco Lippi, 2014. "Price Setting With Menu Cost for Multiproduct Firms," Econometrica, Econometric Society, vol. 82(1), pages 89-135, January.
    2. Mark Gertler & John Leahy, 2008. "A Phillips Curve with an Ss Foundation," Journal of Political Economy, University of Chicago Press, vol. 116(3), pages 533-572, June.
    3. Amit Gandhi & Salvador Navarro & David A. Rivers, 2020. "On the Identification of Gross Output Production Functions," Journal of Political Economy, University of Chicago Press, vol. 128(8), pages 2973-3016.
    4. Caballero, Ricardo J. & Engel, Eduardo M.R.A., 2007. "Price stickiness in Ss models: New interpretations of old results," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 100-121, September.
    5. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115(2), pages 171-199.
    6. Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2016. "The Real Effects of Monetary Shocks in Sticky Price Models: A Sufficient Statistic Approach," American Economic Review, American Economic Association, vol. 106(10), pages 2817-2851, October.
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    Cited by:

    1. Francesco Furlanetto & Antoine Lepetit, 2024. "The Slope of the Phillips Curve," Finance and Economics Discussion Series 2024-043, Board of Governors of the Federal Reserve System (U.S.).
    2. Roberto Tamborini, 2024. "Inflation surprises in a New Keynesian economy with a “true” consumption function," Economic Inquiry, Western Economic Association International, vol. 62(3), pages 1192-1215, July.
    3. George‐Marios Angeletos & Chen Lian & Christian K. Wolf, 2024. "Can Deficits Finance Themselves?," Econometrica, Econometric Society, vol. 92(5), pages 1351-1390, September.
    4. Ángelo Gutiérrez-Daza, 2024. "Business Cycles when Consumers Learn by Shopping," Working Papers 2024-12, Banco de México.
    5. Bence Bardóczy & Jae W. Sim & Andreas Tischbirek, 2024. "The Macroeconomic Effects of Excess Savings," Finance and Economics Discussion Series 2024-062, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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