US wage and price dynamics: A limited information approach

Arbeitspapier

This paper analyzes the dynamics of prices and wages using a limited information approach to estimation. I estimate a two-equation model for the determination of prices and wages derived from an optimization-based dynamic model in which both goods and labor markets are monopolistically competitive; prices and wages can be reoptimized only at random intervals; and, when prices and wages are not reoptimized, they can be partially adjusted to previous-period aggregate inflation. The estimation procedure is a two-step minimum distance estimation that exploits the restrictions imposed by the model on a time-series representation of the data. In the first step, I estimate an unrestricted autoregressive representation of the variables of interest. In the second, I express the model solution as a constrained autoregressive representation of the data and define the distance between unconstrained and constrained representations as a function of the structural parameters that characterize the joint dynamics of inflation and labor share. This function summarizes the cross-equation restrictions between the model and the time-series representations of the data. I then estimate the parameters of interest by minimizing a quadratic function of that distance. I find that the estimated dynamics of prices and wages track actual dynamics quite well and that the estimated parameters are consistent with the observed length of nominal contracts.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 256

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Model Evaluation, Validation, and Selection
• Subject: wage and price dynamics, nominal rigidities, minimum distance estimation ; Lohn ; Preis ; Inflation ; Lohnrigidität ; Preisrigidität ; Monopolistischer Wettbewerb ; Lohnindexierung ; VAR-Modell ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Sbordone, Argia M.
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/60529
• Last update: 10.03.2025, 11:45 AM CET