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U.S. Wage and Price Dynamics: A Limited-Information Approach

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  • Sbordone, Argia M

Abstract

This paper analyzes the dynamics of prices and wages using a limited-information approach to estimation. I estimate a two-equation model for the determination of prices and wages derived from an optimization-based dynamic model, where both goods and labor markets are monopolistically competitive, prices and wages can be reoptimized only at random intervals, and, when not reoptimized, can be partially adjusted to previous-period aggregate inflation. The estimation procedure is a two-step minimum-distance estimation, which exploits the restrictions that the model imposes on a time-series representation of the data. In the first step I estimate an unrestricted autoregressive representation of the variables of interest. In the second step, I express the model solution in the form of a constrained autoregressive representation of the data and define the distance between unconstrained and constrained representations as a function of the structural parameters that characterize the joint dynamics of inflation and labor share. This function summarizes the cross-equation restrictions between the model and the time-series representations of the data: I then estimate the parameters of interest by minimizing a quadratic function of that distance. I find that the estimated dynamics of prices and wages track actual dynamics quite well, and that the estimated parameters are consistent with the observed length of nominal contracts.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 811.

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Date of creation: 12 Jul 2006
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Publication status: Published in International Journal of Central Banking Number 3.Volume(2006): pp. 155-191
Handle: RePEc:pra:mprapa:811

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Citations

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Cited by:
  1. Martin Fukac & Adrian Pagan, 2010. "Limited information estimation and evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 55-70.
  2. Patrick Fève & Julien Matheron & Jean-Guillaume Sahuc, 2009. "Minimum Distance Estimation and Testing of DSGE Models from Structural VARs," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(6), pages 883-894, December.
  3. Galí, Jordi, 2010. "The Return of the Wage Phillips Curve," CEPR Discussion Papers 7700, C.E.P.R. Discussion Papers.
  4. Hasanov, Mübariz & Araç, Aysen & Telatar, Funda, 2010. "Nonlinearity and structural stability in the Phillips curve: Evidence from Turkey," Economic Modelling, Elsevier, vol. 27(5), pages 1103-1115, September.
  5. Furlanetto, Francesco, 2011. "Fiscal stimulus and the role of wage rigidity," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 512-527, April.
  6. Yuriy Gorodnichenko & Serena Ng, 2009. "Estimation of DSGE Models When the Data are Persistent," NBER Working Papers 15187, National Bureau of Economic Research, Inc.
  7. Jordi Galí, 2010. "The Return of the Wage Phillips Curve," Working Papers 474, Barcelona Graduate School of Economics.
  8. Muto, Ichiro & Shintani, Kohei, 2014. "An Empirical Study on the New Keynesian Wage Phillips Curve: Japan and the US," MPRA Paper 53934, University Library of Munich, Germany.
  9. Argia M. Sbordone, 2007. "Inflation persistence: alternative interpretations and policy implications," Staff Reports 286, Federal Reserve Bank of New York.
  10. Francesco Nucci & Marianna Riggi, 2011. "Performance pay and shifts in macroeconomic correlations," Temi di discussione (Economic working papers) 800, Bank of Italy, Economic Research and International Relations Area.
  11. Bilbiie, Florin O. & Straub, Roland, 2012. "Changes in the output Euler equation and asset markets participation," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1659-1672.
  12. Zhang, Wenlang, 2009. "China's monetary policy: Quantity versus price rules," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 473-484, September.
  13. Givens, Gregory E., 2009. "Which price level to target? Strategic delegation in a sticky price and wage economy," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 685-698, December.
  14. Christopher A. Sims, 2008. "Inflation expectations, uncertainty, the Phillips curve, and monetary policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 53.

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