This paper estimates variants of a small-scale New Keynesian model using observations on inflation, inflation expectations and nominal interest rates. We ask whether those variables alone can tell us something about the time series properties of real marginal costs.

In a Bayesian model, a rational-expectations Euler equation involves a learning wedge that disconnects the consumer's IMRS from the rational-expectations pricing kernel. The wedge is extremely volatile and explains the high volatility of the rational-expectations pricing kernel.