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Prices and Unit Labor Costs: A New Test of Price Stickiness

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  • Argia M. Sbordone

    ()
    (Rutgers University)

Abstract

This paper investigates the predictions of a simple optimizing model of nominal price rigidity for the dynamics of inflation. Taking as given the paths of nominal labor compensation and labor productivity to approximate the evolution of marginal costs, I determine the path of prices predicted by the solution of the firms' optimal pricing problem. Model parameters are chosen to maximize the fit with the data. I find evidence of a significant degree of price stickiness and substantial support for the forward-looking model of price setting. The results are robust to the use of alternative forecasting models for the path of unit labor costs, alternative measures of marginal costs, and alternative specifications of the model of price staggering.

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Bibliographic Info

Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200112.

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Date of creation: 19 Oct 2001
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Handle: RePEc:rut:rutres:200112

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Keywords: Inflation; Phillips Curve; Unit Labor Cost;

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