New Keynesian Phillips Curve Model

Evidence and data

Use inflation, expected inflation, marginal cost, output gaps, price-duration evidence, and cost-push shocks. Expectations data are central.

Calibration or measurement

Price stickiness, discounting, markup behavior, and the slope parameter determine inflation response to real activity.

Boundaries

• Output-gap measurement is noisy.
• Pure forward-looking versions struggle with persistence.
• Supply shocks need explicit cost-push terms.

Use guidance

When sufficient

Short-run inflation dynamics when price-setting is forward-looking and the fraction of firms adjusting prices each period is stable. The curve delivers a testable relationship between current inflation, expected future inflation, and real marginal cost, and it is the standard foundation for monetary-policy analysis in DSGE frameworks (Calvo 1983 JME; Gali and Gertler 1999 JME).

When sketch only

Do not use for long-run trend inflation, where the curve has no predictive content: steady-state inflation is pinned by monetary policy, not by the slope parameters. The purely forward-looking version also struggles with inflation persistence; an estimated version typically requires lagged-inflation terms whose structural interpretation is contested.

When to switch

Switch to a sticky-information Phillips curve (Mankiw and Reis 2002 QJE) when the empirical failure is that expectations update too slowly for the forward-looking version to match the data. Switch to a heterogeneous-firm pricing model (Nakamura and Steinsson 2010 QJE) when the extensive margin of price adjustment, selection of which firms reset, is the object of interest.

Falsification signal

Persistent above-target inflation following a demand shock that the central bank credibly commits to reversing, with anchored long-run expectations but sustained near-term deviations, is hard to reconcile with the purely forward-looking NKPC. The 2021 to 2023 US inflation episode, where inflation proved stickier than the model's estimated slope parameters predicted given stated forward guidance, reopened the persistence debate.