The Estimation of the Closed Form in NKPC Inflation Model: Focusing on the Korean Manufacturing Industries (1975-2010)

  • Bae, Joo Han (Department of Economics, Kwandong University) ;
  • Kang, Joo Hoon (Department of Economics, Kwandong University) ;
  • Hong, Seonghyi (Department of Business Administration, Hanzong University) ;
  • Yoon, Ayoung (Department of Economics, Graduate School, Kwandong University)
  • Received : 2014.03.31
  • Accepted : 2014.05.19
  • Published : 2014.06.30


This paper is to develop and estimate a closed form inflation model using the estimates for real marginal costs in manufacturing industries during the sample period 1975-2010. The production function in manufacturing industry incorporates labor, capital, domestic material, and foreign material, assuming constant returns to scale technology and AR(1) process of technological coefficient. We derive real marginal costs from firm's cost minimization with quarterly data and provide new evidences on the new Keynesian Phillips curve for Korea. The main empirical result is that the closed form coefficients ${\delta}_1$ and ${\delta}^{-1}_2$ in manufacturing for PPI inflation proved to be 0.5086 and 0.8779 respectively, similar to the estimates in the U.S. case. These results also are consistent with the functional relationship between the coefficients in hybrid model and its closed form. Thus the paper suggests that the empirical studies on inflation dynamics need to focus on the manufacturing industry with market power, treating PPI inflation as the dependent variable.



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