Seminar Papers, Institute for International Economic Studies, Stockholm University
No 653:
Prices and Unit Labor Costs: A New Test of Price Stickiness
Argia Sbordone ()
Abstract: This paper investigates the predictions of a simple
optimizing model of nominal price rigidity for the aggregate price level
and the dynamics of inflation. I compare the model's predictions with those
of a perfectly competitive, flexible price 'benchmark' model (corresponding
to the model of pricing assumed in standard real business cycle models),
and evaluate how much the introduction of nominal rigidities improves the
model's fit with the data. The model's predictions are derived using only
the firms optimal pricing problem; taken as given the path of nominal labor
compensation, labor productivity and output, I determine the implied path
of prices predicted by the model. Because prices are not a stationary
series, I present my results in terms of the predicted path of the
price/unit labor cost ratio, where the parameters characterizing such paths
are chosen to maximize the fit with the data. I find that while the
evolution of prices relative to unit labor costs is quite different from
what would be predicted by the flexibleprice 'benchmark' model, a simple
model of nominal price rigidity delivers an extremely close approximation
both of the price/unit labor cost ratio and of the inflation series, even
under a very simple approach to the measurement of marginal costs.
Keywords: Sticky prices; Inflation dynamics; Phillips curve; Real marginal cost; (follow links to similar papers)
JELCodes: E31; (follow links to similar papers)
38 pages, October 1, 1998
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 This paper is published as:

Sbordone, Argia, (2002), 'Prices and Unit Labour Costs: A New Test of Price Stickiness', Journal of Monetary Economics, Vol. 49, No. 2, pages 265292
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