 Does labor's share drive inflation?Jeremy Rudd and Karl Whelan () Open Access publications from School of Economics, University College Dublin Abstract: A number of researchers have recently argued that the new-Keynesian Phillips curve matches the empirical behavior of inflation well when the labor income share is used as a driving variable, but fits poorly when deterministically detrended output is used. The theoretical motivation for these results rests on the idea that the output gap-the deviation between actual and potential output-is better captured by the labor income share, in turn implying that central banks should raise interest rates in response to increases in this variable. We show that the empirical evidence generally suggests that the labor share version of the new-Keynesian Phillips curve is a very poor model of price inflation. We conclude that there is little reason to view the labor income share as a good measure of the output gap, or as an appropriate variable for incorporation in a monetary policy rule. Keywords: marginal cost; Output gap; Phillips curve; Sticky prices; Autoregression (Statistics); Inflation (Finance)--United States; Phillips curve (search for similar items in EconPapers) Published in: Journal of Money, Credit and Banking, 37(2) 2005-04 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ucn:oapubs:10197/243 Access Statistics for this paper More papers in Open Access publications from School of Economics, University College Dublin Contact information at EDIRC. |
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