Estimation uncertainty in structural inflation models with real wage rigidities

Abstract

Real wage rigidities have recently been proposed as a way of building intrinsic persistence in inflation within the context of New Keynesian Phillips Curves. Using two recent structural models, the importance of real wage rigidities in the data, and the extent to which such models provide useful information regarding price stickiness, are evaluated empirically. Structural estimation and testing is carried out using Canadian data and identification-robust methods. Results based on the first model reveal important real wages rigidities and underscore the impact of the price of crude materials. However estimates indicate almost fully-flexible prices and an ambiguous role for unemployment. In contrast, and despite some estimate uncertainty, structural estimations are supportive of the second model. Economically-reasonable ranges for estimates of average frequency of price changes are obtained, as well as significant and correctly-signed implied reduced-form coefficient estimates, showing a trade-off between unemployment and inflation in the NKPC. From a methodological perspective, results derive from the treatment of the productivity term as observable although with error, which seems to capture vital information and improve overall identification. From a substantive perspective, the findings suggest that wage-rigidity based New Keynesian Phillips Curves hold promise empirically and provide interesting research directions.