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Prices and unit labor costs: a new test of price stickiness

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  • Sbordone, Argia M.

Abstract

This paper investigates the predictions of a simple optimizing model of nominal price rigidity for the dynamics of inflation. Taking as given the paths of nominal labor compensation and labor productivity to approximate the evolution of marginal costs, I determine the path of prices predicted by the solution of the firms' optimal pricing problem. Model parameters are chosen to maximize the fit with the data. I find evidence of a significant degree of price stickiness and substantial support for the forward-looking model of price setting. The results are robust to the use of alternative forecasting models for the path of unit labor costs, alternative measures of marginal costs, and alternative specifications of the model of price staggering.
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  • Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March.
  • Handle: RePEc:eee:moneco:v:49:y:2002:i:2:p:265-292
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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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