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Prices, Output and Hours: An Empirical Analysis Based on a Sticky Price Model

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  • Julio J. Rotemberg

Abstract

I show that a simple sticky price model based on Rotemberg (1982) is consistent with a variety of facts concerning the correlation of prices, hours and output. In particular, I show that it is consistent with a negative correlation between the detrended levels of output and prices when the Beveridge-Nelson method is used to detrend both the price and output data. Such a correlation, i.e., a negative correlation between the predictable movements in output and the predictable movements in prices is present (and very strong) in U.S. data. Consistent with the model, this correlation is stronger than correlations between prices and hours of work. I also study the size of the predictable price movements that are associated with predictable output movements as well as the degree to which there are predictable movements in monetary aggregates associated with predictable movements in output. These facts are used to shed light on the degree to which the Federal Reserve has pursued a policy designed to stabilize expected inflation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4948.

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Date of creation: Dec 1994
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Publication status: published as Journal of Monetary Economics, Vol. 37, no. 3 (June 1996): 505-533.
Handle: RePEc:nbr:nberwo:4948

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