Inflation and Unit Labor Cost

Robert G. King, Mark W. Watson

Research output: Contribution to journalArticle

20 Scopus citations

Abstract

We study two decompositions of inflation, π, motivated by the standard New Keynesian pricing equation of Gali, Gertler, and Sbordone. The first uses four components: lagged π, expected future π, real unit labor cost (ψ), and a residual. The second uses two components: fundamental inflation (discounted expected future ψ) and a residual. We find large low-frequency differences between actual and fundamental inflation. From 1999 to 2011 fundamental inflation fell by more than 15 percentage points, while actual inflation changed little. We discuss this discrepancy in terms of the data (a large drop in labor's share of income) and through the lens of a canonical structural model.

Original languageEnglish (US)
Pages (from-to)111-149
Number of pages39
JournalJournal of Money, Credit and Banking
Volume44
Issue numberSUPPL. 2
DOIs
StatePublished - Dec 1 2012

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Keywords

  • Fundamental inflation
  • New Keynesian pricing equation
  • Price-markup shocks

Fingerprint Dive into the research topics of 'Inflation and Unit Labor Cost'. Together they form a unique fingerprint.

  • Cite this