Does labor's share drive inflation?

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Title: Does labor's share drive inflation?
Authors: Rudd, Jeremy
Whelan, Karl
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Date: Apr-2005
Online since: 2008-06-13T15:22:35Z
Abstract: A number of researchers have recently argued that the new-Keynesian Phillips curve matches 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. The theoretical motivation for these results rests on the idea 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 this variable. 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.
Type of material: Journal Article
Publisher: Blackwell - published on behalf of The Ohio State University
Journal: Journal of Money, Credit and Banking
Volume: 37
Issue: 2
Start page: 297
End page: 312
Copyright (published version): Copyright 2005 by The Ohio State University
Keywords: marginal costOutput gapPhillips curveSticky prices
Subject LCSH: Autoregression (Statistics)
Inflation (Finance)--United States
Phillips curve
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Language: en
Status of Item: Peer reviewed
Appears in Collections:Economics Research Collection

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