AN EMPIRICAL STUDY ON THE WAGE AND PRICE STICKINESS OF US ECONOMY (1990-2009)

Abstract

The study aims to analyze US economy for the term 1990-2009 with emphasis on price formation and provide evidence on the mechanism through which business cycles occur. According to New Keynesian thinking major structural trait of the economy is non-clearing markets under imperfect competition with asymmetry and uncertainties. Generally empirical evidence is quite scarce in NK literature whereas theoretical research is abundant. Recent empirical research in the field has revealed evidence in favor of wage rigidity in developed economies. In this study econometric estimation of six equations on price formation has also revealed evidence for wage rigidity in the form of “inertia”. Inertia may be either due to expectations” or presence of “staggered wage contracts”. Thus we conclude that business cycle dynamics of fluctuations in output and employment should be followed in the labor markets and relevant models of the economy should concentrate on them to explain dynamics.