Shock-based inference on the Phillips curve with the cost channel

Abstract

Economists use the New-Keynesian Phillips Curve (NKPC) to understand the drivers of current inflation. We assess the usefulness of different combinations of demand shocks to make inference, using identification-robust procedures, on the parameters of the NKPC augmented with the monetary policy cost channel. Using US data, we find that the effect of expected inflation on current inflation is hard to pin down; and that the impact of real marginal costs on inflation is uncertain. The data also does not strongly support the monetary policy cost channel as a determinant of inflation.