Kiel Working Papers, Kiel Institute for World Economics
No 1330:
What Do Micro Price Data Tell Us on the Validity of the New Keynesian Phillips Curve?
Luis J. Alvarez
Abstract: The New Keynesian Phillips curve (NKPC) is now the
dominant model of inflation dynamics. In recent years, a large body of
empirical research has documented price-setting behaviour at the individual
level, allowing the assessment of the micro-foundations of pricing models.
This paper analyses the implications of 25 theoretical models in terms of
individual behaviour and finds that they considerably differ in their
ability to match the key micro stylised facts. However, none is available
to account for all of them, suggesting the need to develop more realistic
micro-founded price setting models.
29 pages, June 2007
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