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Do Unit Labor Cost Drive Inflation in the Euro Area?

Author

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  • Sandra Tatierska

    (National Bank of Slovakia, Research Department)

Abstract

The purpose of this study is to analyze the relationship between unit labor costs and inflation. We estimate an optimal price path model based on a New Keynesian Phillips Curve for eleven euro area countries individually, under the assumption that unit labor costs are proportional to marginal costs. We seek such a model which minimizes the distance between fitted and actual price level fluctuations, with parameters that satisfy theoretical restrictions. The econometric methodology used is a two-step approach method. Estimates show that in eight of the eleven euro area countries there is a plausible relationship between unit labor costs and price level dynamics. The average time needed to adjust prices in line with movements in unit labor costs is estimated to be around eight months. In the case of Slovakia the results indicate rather flexible prices.

Suggested Citation

  • Sandra Tatierska, 2010. "Do Unit Labor Cost Drive Inflation in the Euro Area?," Working and Discussion Papers WP 2/2010, Research Department, National Bank of Slovakia.
    • Handle: RePEc:svk:wpaper:1011
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    References listed on IDEAS

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    Cited by:

    1. 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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    More about this item

    Keywords

    inflation; unit labor costs; NKPC; euro area; VAR;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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