A Limited Information Approach to the Simultaneous Estimation of Wage and Price Dynamics
AbstractThis 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 InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 321.
Date of creation: 11 Nov 2005
Date of revision:
Wage and price dynamics; nominal rigidities; minimum distance estimation.;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
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