Formation of Sectoral Inflation Expectation with the New Keynesian Phillips Curve with Sector Profitability and Marginal Cost
DOI:
https://doi.org/10.54938/ijemdss.2026.05.3.755Keywords:
Profitability, Inflation Expectations, Marginal Cost, New Keynesian Phillips Curve, Output Gap, Unemployment, SectorsAbstract
This paper measures inflation expectations using the New Keynesian Phillips Curve. It analyzes how sectoral-level marginal cost and profitability bring fluctuations to inflation expectations. Prices rise in cycles that determine profitability. When a sector's price rises, corporations boost output to increase profits and hire more people, raising salaries and prices again. Another strategy is to hike prices and cut output. This research examined how this relationship formed the inflation expectation model. This study used firm-level data from PSX 2000–2023. This study splits inflation into 10 sectors based on the Federal Bureau of Statistics' weights, allocates each sector, and aggregates variables by sector, since each industry has distinct price-increase margins. The findings were obtained using a System GMM estimator. Output gap, unemployment gap, profitability, and marginal cost positively affect inflation expectations due to supply shocks. As supply shocks create stagflation and reduce potential output, demand appears to exceed supply. Inflation expectations are set with a lag and lead as adaptive expectations, and marginal cost, output gap, and return on equity as rational expectations.
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