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Conference Paper
Inflation dynamics, marginal cost, and the output gap: evidence from three countries
Recent studies by Gal and Gertler (1999), Gal, Gertler, and Lpez-Salido (GGL) (2001a, 2001b), and Sbordone (1998, 2001) have argued that the New Keynesian Phillips curve (Calvo pricing model) is empirically valid, provided that real marginal cost rather than detrended output is used as the variable driving inflation. GGL (2001a) conclude that real marginal cost is not closely related to the output gap, and that models for monetary policy therefore need to include labor market rigidities. An alternative interpretation is that marginal cost and the output gap are closely related, but that the ...