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Aggregate Evidence on Price Rigidities and the Inflation-Output Trade-Off: A Factor Analysis of Factor Shares

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  • Christian Jensen

    (Moore School of Business, University of South Carolina)

Abstract

We find inflation statistically significant in explaining movements in income shares of labor, capital and profits, controlling for other potential sources of these co-movements, such as competition or unionization. These controls are generated through factor analysis, which explains covariances of observed variables in terms of underlying unobservables. Accounting for the observed comovement between inflation and the income shares without nominal rigidities is difficult, since income shares are not likely to impact inflation, or monetary policy, and are independent of most variables and shocks, including those to productivity. Hence, the relationship supports the relevance of nominal rigidities at the aggregate level.

Suggested Citation

  • Christian Jensen, 2017. "Aggregate Evidence on Price Rigidities and the Inflation-Output Trade-Off: A Factor Analysis of Factor Shares," Annals of Economics and Finance, Society for AEF, vol. 18(2), pages 227-252, November.
    • Handle: RePEc:cuf:journl:y:2017:v:18:i:2:jensen
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    More about this item

    Keywords

    Price rigidities; Inflation-output trade-off; Phillips curve; Sticky prices; Monetary neutrality; Factor analysis;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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