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Measuring the Interaction of Wage and Price Phillips Curves for the U.S. Economy

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  • Chen Pu

    ()
    (Bieleleld University)

  • Flaschel Peter

    ()
    (Bielefeld University)

Abstract

This paper demonstrates that demand pressure, besides hybrid cost-pressure, matters both on the labor market and on the market for goods in the determination of wage and price inflation. We discuss theoretically and estimate for the USA wage and price Phillips curves exhibiting their own demand pressure measure in their respective market and weighted averages of perfectly foreseen short- and adaptively changed medium-run cost-pressure terms in addition. These curves are in their formal structure closely related to NK staggered wage and price dynamics, but differ radically from them in their implications. Our findings are that wages are more flexible than prices with respect to their demand pressure measure and that price determination gives much more weight to medium term inflation than does wage inflation. Supplemented by Okun's law, this implies a reduced form real wage dynamic that depends positively on economic activity, and thus an adverse type of real wage adjustment, if goods demand depends positively on real wages.

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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 10 (2006)
Issue (Month): 4 (December)
Pages: 1-35

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Handle: RePEc:bpj:sndecm:v:10:y:2006:i:4:n:2

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  1. N. Gregory Mankiw, 2000. "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," NBER Working Papers 7884, National Bureau of Economic Research, Inc.
  2. Spanos, Aris, 1990. "The simultaneous-equations model revisited : Statistical adequacy and identification," Journal of Econometrics, Elsevier, Elsevier, vol. 44(1-2), pages 87-105.
  3. Chiarella, Carl & Flaschel, Peter, 1996. "Real and monetary cycles in models of Keynes-Wicksell type," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 30(3), pages 327-351, September.
  4. Chiarella,Carl & Flaschel,Peter, 2000. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521643511.
  5. Ray C. Fair, 2000. "Testing the NAIRU Model for the United States," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 64-71, February.
  6. Cheng Hsiao, 1997. "Cointegration and Dynamic Simultaneous Equations Model," Econometrica, Econometric Society, Econometric Society, vol. 65(3), pages 647-670, May.
  7. Pu Chen & Carl Chiarella & Peter Flaschel & Willi Semmler, 2006. "Keynesian Macrodynamics and the Phillips Curve. An Estimated Baseline Macromodel for the U.S. Economy," Working Paper Series, Finance Discipline Group, UTS Business School, University of Technology, Sydney 147, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  8. Laxton, Douglas & Rose, David & Tambakis, Demosthenes, 1999. "The U.S. Phillips curve: The case for asymmetry," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 23(9-10), pages 1459-1485, September.
  9. Chiarella,Carl & Flaschel,Peter & Franke,Reiner, 2005. "Foundations for a Disequilibrium Theory of the Business Cycle," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521850254.
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Cited by:
  1. Christian Proaño, 2009. "(De-)Stabilizing two-country macroeconomic interactions in an estimated model of the U.S. and the Euro Area," International Economics and Economic Policy, Springer, vol. 6(4), pages 421-443, December.
  2. Christian Proaño Acosta, 2007. "Gradual Wage-Price Adjustments, Labour Market Frictions and Monetary Policy Rules," IMK Working Paper 09-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  3. Pu Chen & Chih-Ying Hsiao, 2010. "Causal Inference for Structural Equations: With an Application to Wage-Price Spiral," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 36(1), pages 17-36, June.
  4. Christian R. Proano, 2009. "Heterogenous Behavioral Expectations, FX Fluctuations and Dynamic Stability in a Stylized Two-Country Macroeconomic Model," IMK Working Paper 03-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  5. Proaño, Christian R., 2011. "Exchange rate determination, macroeconomic dynamics and stability under heterogeneous behavioral FX expectations," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 77(2), pages 177-188, February.
  6. Toichiro Asada & Carl Chiarella & Peter Flaschel & Christian R. Proaño, 2007. "Keynesian AD-AS, Quo Vadis?," Working Paper Series, Finance Discipline Group, UTS Business School, University of Technology, Sydney 151, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  7. Chen, Pu, 2010. "A time series causal model," MPRA Paper 24841, University Library of Munich, Germany.
  8. Ekkehard Ernst & Peter Flaschel & Christian Proano & Willi Semmler, 2006. "Disequilibrium Macroeconomic Dynamics, Income Distribution and Wage-Price Phillips Curves," IMK Working Paper 04-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  9. Chen, Pu & Hsiao, Chih-Ying, 2010. "Looking behind Granger causality," MPRA Paper 24859, University Library of Munich, Germany.

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