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An Optimizing Model of U.S. Wage and Price Dynamics

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  • Argia M. Sbordone

    (Rutgers University)

Abstract

The objective of this paper is to provide an optimizing model of wage and price setting consistent with U.S. data. The paper first investigates the predictions of an optimizing labor supply model for the aggregate nominal wage, taking as given the evolution of prices and quantities. In this part it seeks to determine whether a standard specification of consumption/leisure preferences is consistent with the data, and to what extent nominal or real rigidities in the wage setting process improve the fit with the data. Then it combines the evolution of wages predicted by this model with the evolution of prices predicted by staggered-price models to provide a model of the joint determination of prices and wages, given the evolution of real quantities. It thus supplies a "Phillips curve" specification that is consistent with intertemporal optimization and rational expectations.

Suggested Citation

  • Argia M. Sbordone, 2001. "An Optimizing Model of U.S. Wage and Price Dynamics," Departmental Working Papers 200110, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:200110
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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