Input-Output Structure and New Keynesian Phillips Curve

MORO, ALESSIO

2009-01-01

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Abstract

I show that an input-output production structure reinforces persistence in the pricing behavior of firms using a Calvo mechanism. In particular, the optimal price today depends upon the expected optimal prices in the infinite future and those set in the infinite past. It follows that the effect of the marginal cost on inflation in the new Keynesian Phillips curve is dampened with respect to the standard model. This helps in explaining the difference between the most recent empirical evidence on price adjustment frequency in the U.S. and structural estimates of the new Keynesian Phillips curve.