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Should monetary policy target labor's share of income?

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Abstract

In recent work, Woodford (2001) presents evidence that using real unit labor costs (labor's share of income) as a driving variable in the new-Keynesian Phillips curve yields a superior fit for inflation relative to a model that uses deterministically detrended real GDP. This evidence leads him to conclude that the output gap the deviation between actual and potential output is better captured by the labor income share, in turn implying that the monetary authority should raise interest rates in response to increases in this variable. We document that the empirical case for the superiority of the labor's share version of the new-Keynesian model is actually quite weak, and conclude that there is little reason to view the labor income share as an appropriate target for monetary policy.

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  • Jeremy B. Rudd & Karl Whelan, 2002. "Should monetary policy target labor's share of income?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    • Handle: RePEc:fip:fedfpr:y:2002:i:mar:x:4
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    1. Rudd, Jeremy & Whelan, Karl, 2005. "New tests of the new-Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1167-1181, September.
    2. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 127-159.
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    5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    6. Marvin Goodfriend & Robert G. King, 2001. "The Case for Price Stability," NBER Working Papers 8423, National Bureau of Economic Research, Inc.
    7. 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.
    8. Argia M. Sbordone, 2002. "An optimizing model of U.S. wage and price dynamics," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    9. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135, Elsevier.
    10. Fuhrer, Jeffrey C., 2010. "Inflation Persistence," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 9, pages 423-486, Elsevier.
    11. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
    12. J. B. Taylor & M. Woodford (ed.), 1999. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 1, number 1.
    13. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
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    Cited by:

    1. Maritta Paloviita, 2006. "Inflation Dynamics in the Euro Area and the Role of Expectations," Empirical Economics, Springer, vol. 31(4), pages 847-860, November.
    2. Günter Coenen & Volker Wieland, 2002. "Inflation Dynamics and International Linkages: A Model of the United States, the Euro Area and Japan," Computing in Economics and Finance 2002 240, Society for Computational Economics.
    3. Coenen, Gunter, 2007. "Inflation persistence and robust monetary policy design," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 111-140, January.
    4. repec:zbw:bofrdp:2004_021 is not listed on IDEAS
    5. Paloviita, Maritta & Mayes, David, 2005. "The use of real-time information in Phillips-curve relationships for the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 415-434, December.
    6. Paloviita, Maritta, 2004. "Inflation dynamics in the euro area and the role of expectations : further results," Research Discussion Papers 21/2004, Bank of Finland.
    7. Paloviita, Maritta & Mayes, David, 2005. "The use of real-time information in Phillips-curve relationships for the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 415-434, December.
    8. Maritta Paloviita, 2004. "Inflation dynamics in the euro area and the role of expectations," Macroeconomics 0405015, University Library of Munich, Germany.
    9. repec:zbw:bofrdp:2004_016 is not listed on IDEAS
    10. Maritta Paloviita, 2009. "Estimating open economy Phillips curves for the euro area with directly measured expectations," New Zealand Economic Papers, Taylor & Francis Journals, vol. 43(3), pages 233-254.
    11. Günter Coenen & Volker Wieland, 2002. "Inflation Dynamics and International Linkages: A Model of the United States, the Euro Area and Japan," Computing in Economics and Finance 2002 240, Society for Computational Economics.
    12. Lars Sondergaard, 2003. "Using Instrumental Variables to Estimate the Share of Backward- Looking Firms," Macroeconomics 0308009, University Library of Munich, Germany.
    13. repec:zbw:bofrdp:2008_016 is not listed on IDEAS
    14. repec:zbw:bofrdp:2002_020 is not listed on IDEAS

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