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UNIT TOTAL COSTS: AN ALTERNATIVE MARGINAL COST PROXY FOR INFLATION DYNAMICS

Published online by Cambridge University Press:  28 September 2015

George J. Bratsiotis  and
Wayne A. Robinson
George J. Bratsiotis*
Affiliation:
University of Manchester and Centre for Growth and Business Cycle Research (CGBCR)
Wayne A. Robinson
Affiliation:
Bank of Jamaica
*
Address correspondence to: George J. Bratsiotis, Economics, School of Social Sciences, University of Manchester, Manchester M13 9PL, UK; e-mail: [email protected].
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Abstract

The New Keynesian Phillips curve (NKPC) driven by unit labor costs has been criticized for failing to match inflation dynamics and for failing to explain the duration of price contracts. This paper extends recent attempts in the literature to improve the fit of the NKPC, by introducing a fuller marginal cost proxy, unit total costs, that is derived from both labor and nonlabor unit costs; the latter include capital-related costs and production taxes. Borrowing costs are examined separately, as in the cost channel literature. Unit total costs are shown to improve the fit of the short-run variation in inflation and strengthen the empirical support for the role of expectations-based inflation persistence. They also imply a duration of fixed nominal contracts that is closer to those suggested by firm-level surveys. The cost channel becomes relatively less important when unit total costs, rather than unit labor costs, are used as a marginal cost proxy.

Keywords

New Keynesian Phillips CurveInflationPrice RigidityMarginal Cost ProxyProduction CostsBorrowing CostsCost Channel
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 7 , October 2016 , pp. 1826 - 1849
Copyright
Copyright © Cambridge University Press 2015 

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