The New Keynesian Phillips curve: Lessons from single-equation econometric estimation,” Federal Reserve Bank of Richmond Economic Quarterly

T he last decade has seen a renewed interest in the Phillips curve thatmight be an odd awakening for a macroeconomic Rip van Winklefrom the 1980s or even the 1990s. Wasn’t the Phillips curve tradition discredited by the oil prices shocks of the 1970s or by theoretical critiques of Friedman, Phelps, Lucas, and Sargent? It turns out that the New Keynesian Phillips curve (NKPC) is consistent with both the theoretical demands of modern macroeconomics and some key statistical properties of inflation. In fact, the NKPC can take a sufficient number of guises to accommodate a wide range of perspectives on inflation. The NKPC originated in descriptions of price setting by firms that possess market power. For example, Rotemberg (1982) describes how a monopolist sets prices if it faces a cost of adjustment that rises with the scale of the price change. He shows that prices then gradually track a target price and also depend on expected, future price targets. Calvo (1983) instead describes firms that are monopolistic competitors. They change their prices periodically. Knowing that some time may pass before they next set prices, firms anticipate future cost and demand conditions, as well as current ones, in setting their price. Also, the staggering or nonsynchronization of price setting by firms James M. Nason is a policy advisor and research economist at the Federal Reserve Bank o