Essays on price-setting models and inflation dynamics

This dissertation investigates the empirical validity of several theories on …rms' price-setting behavior and the dynamics of in ‡ation.The dissertation consists of two essays.The …rst essay, Reassessment of the New Keynesian Phillips Curve: Gross vs. Value-Added Price In ‡ation, reexamines the new Keynesian Phillips curve based on the distinction between gross price and value-added price in ‡ation.It is shown that a standard new Keynesian Phillips curve can be interpreted as describing the behavior of gross price in ‡ation and, therefore, it is essential to incorporate intermediate input costs in constructing marginal cost measures.Moreover, from this gross price in ‡ation model, the valued-added price in ‡ation model is derived explicitly, in which the real price of intermediate inputs plays an important role.The new Keynesian Phillips curve is tested using both in ‡ation models.Our results show that (1) the evidence for the new Keynesian Phillips curve is weak for the whole sample period regardless of model speci…cation; (2) in some subsamples, however, especially during high and volatile in ‡ation periods, the evidence becomes stronger for the value-added price in ‡ation model; and (3) the e¤ects on in ‡ation of the real intermediate input prices and the backward-looking behavior of economic agents are substantial.The second essay, The Empirical Relationship between the Markup, Marginal Cost and In ‡ation, and Its Implications for Price-Setting Models, studies how in ‡ation The road to this dissertation was not an easy task.Sometimes it was …lled with excitement.In other times, I was confronted with big obstacles.Each time I had a hardship without knowing where to go, my adviser, William Dupor, suggested great ideas and gave me encouragements.Discussions with him led me to new ways of solving the problems.Professor Paul Evans gave me invaluable advices and insights as well as a vast amount of information.I was always deeply impressed