Does the labor share of income drive inflation?
Woodford (2001) has presented evidence that the new-Keynesian Phillips curve fits the empirical behavior of inflation well when the labor income share is used as a driving variable, but fits poorly when deterministically detrended output is used. He concludes that the output gap--the deviation between actual and potential output--is better captured by the labor income share, in turn implying that central banks should raise interest rates in response to increases in the labor share. We show that the empirical evidence generally suggests that the labor share version of the new-Keynesian Phillips curve is a very poor model of price inflation. We conclude that there is little reason to view the labor income share as a good measure of the output gap, or as an appropriate variable for incorporation in a monetary policy rule.
|Date of creation:||2002|
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- Sbordone, Argia M., 2002.
"Prices and unit labor costs: a new test of price stickiness,"
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- Argia M. Sbordone, 2001. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Departmental Working Papers 199822, Rutgers University, Department of Economics.
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- Jeremy B. Rudd & Karl Whelan, 2001.
"New tests of the New-Keynesian Phillips curve,"
Finance and Economics Discussion Series
2001-30, Board of Governors of the Federal Reserve System (U.S.).
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"The Cyclical Behavior of Prices and Costs,"
NBER Working Papers
6909, National Bureau of Economic Research, Inc.
- Argia M. Sbordone, 2002.
"An optimizing model of U.S. wage and price dynamics,"
Federal Reserve Bank of San Francisco, issue Mar.
- Argia M. Sbordone, 2001. "An Optimizing Model of U.S. Wage and Price Dynamics," Departmental Working Papers 200110, Rutgers University, Department of Economics.
- Ryo Kato, 2003. "Matlab code for Sbordone's estimation for a sticky price model," QM&RBC Codes 116, Quantitative Macroeconomics & Real Business Cycles.
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"The case for price stability,"
01-02, Federal Reserve Bank of Richmond.
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