The Overlooked Assumption Behind the New Keynesian Phillips Curve

Belanger, Gilles (2014): The Overlooked Assumption Behind the New Keynesian Phillips Curve.

Abstract

The New Keynesian Phillips Curve rests on an assumption not mentioned in the literature. Specifically, firms that are price constrained align their production along the demand curve, ignoring the effects of marginal cost on supply. This paper investigates what happens when the relationship between marginal cost and pricing conforms instead to standard microeconomic theory. It shows that the New Keynesian Phillips Curve is invalid and prices are not procyclical, but acyclical in this case. Therefore, if the assumption in question is necessary to the model, it should be acknowledged for the sake of transparency.

• Item Type: MPRA Paper
• Language: English
• Keywords: New Keynesian Phillips Curve, micro-foundations, price rigidity, marginal cost.
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

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