How Steep is the Phillips Curve in Developing Economies? A Sufficient Statistics Approach and Estimates for India

We estimate the Phillips curve for India to shed light on the output-inflation tradeoff in developing economies. We develop a method to estimate the slope of the Phillips curve based on sufficient statistics that apply to a broad class of New Keynesian models. Using portable causal research designs, we estimate the firm-level passthrough of cost shocks into prices at different horizons, and the slope of marginal cost curves at different levels of aggregation. These empirical moments map into the slope of the Phillips curve and yield a decomposition into three terms: price rigidity, micro real rigidities, and macro real rigidities. The slope of the Phillips curve in India is one order of magnitude steeper than in the United States. This difference is explained by weaker macro real rigidities and less rigid prices. Extending the model to allow for input misallocation, we find that the re-allocative effects of monetary policy affect the Phillips curve, but this effect is small.