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December 2006 issue
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Wong
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Davig, Gerlach
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Firm-Specific Labor and Firm-Specific Capital: Implications for the Euro-Data New Phillips Curve

by  Julien Matheron
Banque de France, Research Division

Abstract

Standard GMM estimates of the New Phillips curve on euro-area data yield degrees of nominal rigidity that are not in accordance with recent microeconomic evidence. This paper studies whether similar conclusions are reached in a richer model where price setters face firm-specific capital and/or firm-specific labor. We find that combining these elements or considering firm-specific labor alone leads to statistically significant and economically reasonable estimates of the degree of nominal rigidity. In contrast, ignoring firm-specific labor yields estimates that are not supported by microeconomic evidence.

JEL Codes: E1, E3.


Full article (PDF, 32 pages 244 kb)