Type

Journal Article

Authors

Karl Whelan
Jeremy Rudd

Subjects

Economics

Topics
monetary policy inflation finance united states phillips curve interest rates output gap autoregression statistics marginal cost sticky prices

Does labor's share drive inflation? (2005)

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.
Collections Ireland -> University College Dublin -> School of Economics
Ireland -> University College Dublin -> College of Social Sciences and Law
Ireland -> University College Dublin -> Economics Research Collection

Full list of authors on original publication

Karl Whelan, Jeremy Rudd

Experts in our system

1
Karl Whelan
University College Dublin
Total Publications: 70