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A Limited Information Approach to the Simultaneous Estimation of Wage and Price Dynamics

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  • Argia M. Sbordone

    ()
    (Domestic Research Federal Reserve Bank of New York)

Abstract

This paper analyzes the dynamics of prices and wages using a limited information approach to estimation. I consider 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 re-optimized only at random intervals, and, when not re-optimized, can be partially adjusted to the previous period 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. Specifically, 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. The parameters of interest are then estimated 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 Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 321.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:321

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Related research

Keywords: Wage and price dynamics; nominal rigidities; minimum distance estimation.;

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Cited by:
  1. Bakhshi, Hasan & Khan, Hashmat & Rudolf, Barbara, 2007. "The Phillips curve under state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2321-2345, November.
  2. Eric Jondeau & Jean-Guillaume Sahuc, 2008. "Optimal Monetary Policy in an Estimated DSGE Model of the Euro Area with Cross-Country Heterogeneity," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 23-72, June.
  3. Gregory Erin Givens, 2006. "Revisiting the Delegation Problem in a Sticky Price and Wage Economy," Working Papers 200601, Middle Tennessee State University, Department of Economics and Finance.
  4. Gali, Jordi & Gertler, Mark & David Lopez-Salido, J., 2005. "Robustness of the estimates of the hybrid New Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1107-1118, September.
  5. Argia M. Sbordone & Timothy Cogley, 2004. "A Search for a Structural Phillips Curve," Computing in Economics and Finance 2004 291, Society for Computational Economics.
  6. Sbordone, Argia M., 2005. "Do expected future marginal costs drive inflation dynamics?," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1183-1197, September.
  7. Rudolf, B. & Bakhshi, H., 2005. "The Phillips Curve Under State-Dependent Pricing," Computing in Economics and Finance 2005 68, Society for Computational Economics.
  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.

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