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Inflation and Unit Labor Cost

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  • ROBERT G. KING
  • MARK W. WATSON

Abstract

We study two decompositions of inflation, , motivated by a New Keynesian Pricing Equation. The first uses four components: lagged , expected future , real unit labor cost ( ), and a residual. The second uses two components: fundamental inflation (discounted expected future ) and a residual. We find large low-frequency differences between actual and fundamental inflation. From 1999-2011 fundamental inflation fell by more than 15 percentage points, while actual inflation changed little. We discuss this discrepancy in terms of the data (a large drop in labor's share of income) and through the lens of a canonical structural model (Smets-Wouters (2007)).
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Suggested Citation

  • Robert G. King & Mark W. Watson, 2012. "Inflation and Unit Labor Cost," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 111-149, December.
  • Handle: RePEc:mcb:jmoncb:v:44:y:2012:i::p:111-149
    DOI: j.1538-4616.2012.00555.x
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    References listed on IDEAS

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    1. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
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    11. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, January.
    12. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
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    16. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
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    Cited by:

    1. Francesco Bianchi & Leonardo Melosi, 2017. "Escaping the Great Recession," American Economic Review, American Economic Association, vol. 107(4), pages 1030-1058, April.
    2. Charles Ka Yui LEUNG & Joe Cho Yiu NG, 2018. "Macro Aspects of Housing," ISER Discussion Paper 1030, Institute of Social and Economic Research, Osaka University.
    3. Hess Chung & Edward Herbst & Michael T. Kiley, 2015. "Effective Monetary Policy Strategies in New Keynesian Models: A Reexamination," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 289-344.
    4. Simon Gilchrist & Raphael Schoenle & Jae Sim & Egon Zakrajšek, 2017. "Inflation Dynamics during the Financial Crisis," American Economic Review, American Economic Association, vol. 107(3), pages 785-823, March.
    5. repec:eee:moneco:v:92:y:2017:i:c:p:47-63 is not listed on IDEAS
    6. repec:eee:dyncon:v:81:y:2017:i:c:p:140-161 is not listed on IDEAS
    7. Del Negro, Marco & Hasegawa, Raiden B. & Schorfheide, Frank, 2016. "Dynamic prediction pools: An investigation of financial frictions and forecasting performance," Journal of Econometrics, Elsevier, vol. 192(2), pages 391-405.
    8. repec:eee:moneco:v:94:y:2018:i:c:p:41-59 is not listed on IDEAS
    9. Mangin, Sephorah & Sedláček, Petr, 2018. "Unemployment and the labor share," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 41-59.
    10. Albonico, Alice & Paccagnini, Alessia & Tirelli, Patrizio, 2017. "Great recession, slow recovery and muted fiscal policies in the US," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 140-161.
    11. repec:hur:ijaraf:v:7:y:2017:i:3:p:38-47 is not listed on IDEAS
    12. Filippo Gori, 2016. "Disentangling the Monetary Policy Stance," Bank of Lithuania Working Paper Series 27, Bank of Lithuania.
    13. Egorov D.A. (Егоров, Д.А.) & Perevyshina E.A. (Перевышина, Е.А.), 2016. "Modelling of Inflationary Processes in Russia
      [Моделирование Инфляционных Процессов В России]
      ," Working Papers 2138, Russian Presidential Academy of National Economy and Public Administration.

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