A Limited Information Approach to the Simultaneous Estimation of Wage and Price Dynamics

Argia Sbordone

No 321, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: This paper analyzes the dynamics of prices and wages using a limited information approach to estimation. I consider a two-equation model for the determination of prices and wages derived from an optimization-based dynamic model, where both goods and labor markets are monopolistically competitive, prices and wages can be re-optimized only at random intervals, and, when not re-optimized, can be partially adjusted to the previous period inflation. The estimation procedure is a two-step minimum distance estimation, which exploits the restrictions that the model imposes on a time series representation of the data. Specifically, in the first step I estimate an unrestricted autoregressive representation of the variables of interest. In the second step, I express the model solution in the form of a constrained autoregressive representation of the data, and define the distance between unconstrained and constrained representations as a function of the structural parameters that characterize the joint dynamics of inflation and labor share. This function summarizes the cross-equation restrictions between the model and the time series representations of the data. The parameters of interest are then estimated by minimizing a quadratic function of that distance. I find that the estimated dynamics of prices and wages track actual dynamics quite well, and that the estimated parameters are consistent with the observed length of nominal contracts.

Keywords: Wage and price dynamics; nominal rigidities; minimum distance estimation. (search for similar items in EconPapers)
JEL-codes: C32 C52 E32 (search for similar items in EconPapers)
Date: 2005-11-11
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:321

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