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Measuring the Interaction of Wage and Price Phillips Curves for the U.S. Economy

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  • Chen Pu

    (Bieleleld University)

  • Flaschel Peter

    (Bielefeld University)

Abstract

This paper demonstrates that demand pressure, besides hybrid cost-pressure, matters both on the labor market and on the market for goods in the determination of wage and price inflation. We discuss theoretically and estimate for the USA wage and price Phillips curves exhibiting their own demand pressure measure in their respective market and weighted averages of perfectly foreseen short- and adaptively changed medium-run cost-pressure terms in addition. These curves are in their formal structure closely related to NK staggered wage and price dynamics, but differ radically from them in their implications. Our findings are that wages are more flexible than prices with respect to their demand pressure measure and that price determination gives much more weight to medium term inflation than does wage inflation. Supplemented by Okun's law, this implies a reduced form real wage dynamic that depends positively on economic activity, and thus an adverse type of real wage adjustment, if goods demand depends positively on real wages.

Suggested Citation

  • Chen Pu & Flaschel Peter, 2006. "Measuring the Interaction of Wage and Price Phillips Curves for the U.S. Economy," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(4), pages 1-35, December.
    • Handle: RePEc:bpj:sndecm:v:10:y:2006:i:4:n:2
    DOI: 10.2202/1558-3708.1255
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    References listed on IDEAS

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    Cited by:

    1. Proaño, Christian R., 2012. "Gradual wage-price adjustments, labor market frictions and monetary policy rules," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 220-235.
    2. Shahram Fattahi, 2012. "Economic Growth, Inflation and Wage Growth: Experience from a Developing Country," Business and Management Research, Business and Management Research, Sciedu Press, vol. 1(2), pages 88-93, June.
    3. Chen, Pu, 2010. "A time series causal model," MPRA Paper 24841, University Library of Munich, Germany.
    4. Pu Chen & Chih-Ying Hsiao, 2010. "Causal Inference for Structural Equations: With an Application to Wage-Price Spiral," Computational Economics, Springer;Society for Computational Economics, vol. 36(1), pages 17-36, June.
    5. Christian Proaño, 2009. "(De-)Stabilizing two-country macroeconomic interactions in an estimated model of the U.S. and the Euro Area," International Economics and Economic Policy, Springer, vol. 6(4), pages 421-443, December.
    6. Christian R. Proano, 2009. "Heterogenous Behavioral Expectations, FX Fluctuations and Dynamic Stability in a Stylized Two-Country Macroeconomic Model," IMK Working Paper 03-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    7. Chen, Pu & Hsiao, Chih-Ying, 2010. "Looking behind Granger causality," MPRA Paper 24859, University Library of Munich, Germany.
    8. Rudiger von Arnim & Jose Barrales, 2015. "Demand-driven Goodwin cycles with Kaldorian and Kaleckian features," Review of Keynesian Economics, Edward Elgar Publishing, vol. 3(3), pages 351-373, July.
    9. Mamadou Bobo Diallo & Peter Flaschel & Hans-Martin Krolzig & Christian R. Proano, 2011. "Reconsidering the Dynamic Interaction between Real Wages and Macroeconomic Activity," Research in World Economy, Research in World Economy, Sciedu Press, vol. 2(1), pages 77-93, April.
    10. Toichiro Asada & Carl Chiarella & Peter Flaschel & Christian R. Proaño, 2007. "Keynesian AD-AS, Quo Vadis?," Working Paper Series 151, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    11. 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.
    12. Proaño, Christian R., 2011. "Exchange rate determination, macroeconomic dynamics and stability under heterogeneous behavioral FX expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 77(2), pages 177-188, February.
    13. Gaetano Lisi, 2021. "Can the AD-AS Model Explain the Presence and Persistence of the Underground Economy? Evidence from Italy," Economies, MDPI, vol. 9(4), pages 1-11, November.

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