Does Labor's Share Drive Inflation?

By Jeremy B. Rudd, Karl Whelan. 2005

115 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/126541a0541429584db4c8a1a5f379e91344be97

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In Economics and Econometrics

Citations in the corpus

Vacancies, Unemployment, and the Phillips Curve (2007, background): “Comparing (33) and (36), note that the rst term in brackets corresponds in the data to the wage bill in either model.”
Inflation Dynamics and the Great Recession (2011, unknown): “Rudd and Whelan (2005, 2007) and Mazumder (2010) criticize Gali and Gertler’s work.”
Natural rate measures in an estimated DSGE model of the U.S. economy (2008, unknown): “This has led some to criticize the new-Keynesian model as failing to connect with basic intuition as to the nature of expansions and contractions (see, Rudd and Whelan, 2005 ).”
A Quantitative Comparison of Sticky-Price and Sticky-Information Models of Price Setting (2006, background): “Finally, Rudd and Whelan (2005c) emphasize that detrended output enters reduced-form regressions for inflation with a highly-significant coefficient.”