Product Market Regulation, Trend Inflation and Inflation Dynamics in the New Keynesian Phillips Curve

In this empirical paper, we take a close look at the impact of observed changes in the product market regulation, which raises barriers to entry and empediments to competition, on inflation dynamics since the early 1980s. We use an enlarged new Keynesian Phillips curve (NKPC) allowing for entry of firms and for increasing competitive pressures with the number of firms and non zero trend inflation. Using OECD indicators on product market regulations, characterized by persistent fluctuations of their underlying trends, and taking into account the non stationary properties of the inflation process, we investigate the empirical relevance of this NKPC for inflation dynamics in the US and France, with the additional assumption that shifts in monetary inflation target are related to changes in the product market regulation. We also assume VAR expectations. The results point out that product market regulation is a good candidate as an exogenous structural source of the observed persistence in inflation for the last thirty years in both the US and France.