New Keynesian Phillips Curve Model

The New Keynesian Phillips Curve derives inflation from price-setting with nominal rigidity. Calvo pricing supplies the standard microfoundation: only some firms can reset prices each period.

Inflation today depends on expected future inflation and real marginal cost, often proxied by the output gap in teaching versions. Galí and Gertler's empirical work made the marginal-cost specification central to the modern debate.

The model is forward-looking. It is not the old Phillips Curve with expectations pasted on; it is a pricing equation derived from firms that set prices while looking ahead.

The discount factor weights future inflation. If firms expect future inflation, price setters who can adjust today raise prices more now.

The slope parameter kappa captures how strongly real activity or marginal cost passes into inflation. More flexible prices or stronger real rigidities change that slope.

Cost-push shocks shift inflation independently of the output gap. That is why central banks face a tradeoff after supply disturbances.

Central banks use NKPC logic to interpret inflation persistence and the role of expectations. Anchored expectations flatten the near-term inflation response to shocks.

Estimating the slope is difficult. Output gaps are revised, marginal cost is hard to observe, and inflation expectations vary across households, firms, and markets.

The route is best read as the inflation block in a larger New Keynesian model, not as a standalone forecast model.