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The Relationship Between Nominal Wage and Price Flexibility: New Evidence

Solórzano Diego and Dixon Huw

No 2020-20, Working Papers from Banco de México

Abstract: The frequencies at which prices and wages are adjusted, interpreted as price and wage flexibility, are key elements in workhorse models used for policy analysis. Yet, there is little evidence regarding the relationship between these two sources of nominal rigidities. Using two large and highly disaggregated price and wage microdata sets, this paper provides evidence that the industries changing more frequently wages reset prices more often. Once the frequency of wage adjustments is accounted for, the share of labor costs becomes less relevant in explaining the frequency of price changes, calling for a reinterpretation on previous findings that the labor share is a robust determinant of the frequency of price adjustments. The results in this study have implications for New Keynesian models' microfoundations, as their predictions have proven to be sensitive to the nominal rigidities assumptions.

JEL-codes: C26 E31 J31 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-lma, nep-mac and nep-mon
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