Hybrid seminar: Heterogeneous Firms and the Phillips Curve

This paper estimates marginal cost curves and demand curves facing heterogeneous firms to provide evidence on the slope of the Phillips curve. The paper utilizes prices and quantities of outputs and factor inputs of French and Dutch manufacturing firms along with exogenous downstream demand instruments from global input-output and trade data to identify the parameters. Model heterogeneity is addressed using a clustering method to classify firms according to their production technology and observed cost shock pass-through. We find that more productive firms have flatter marginal cost curves and exhibit a lower price response to changes in output. The aggregate Phillips curve will be flatter when the more productive firms absorb a larger portion of demand shocks, which generally is the case. Nonetheless, idiosyncratic shifts in demand to other clusters of firms, or cost shocks specific to firms with different pass-through, could result in time-variation in the slope of the aggregate Phillips curve.