Factor Intensity and Price Rigidity: Evidence and Theory

60 Pages Posted: 3 Apr 2009

See all articles by Ekaterina Peneva

Ekaterina Peneva

Board of Governors of the Federal Reserve System

Date Written: January , 2009

Abstract

This paper establishes a new empirical finding: the degree of labor intensity and the degree of price flexibility are negatively correlated across industrial sectors. I model this in an economy with staggered nominal wage contracts and production sectors that differ in labor and capital intensities. Nominal disturbances affect capital-intensive and labor-intensive sectors asymmetrically: prices of labor-intensive goods change less than do prices of capital-intensive goods. In addition, when prices are costly to adjust, more firms in the capital-intensive sectors optimally choose to update their prices than firms in the labor-intensive sectors. Thus, varying factor intensity generates different degrees of price stickiness across sectors that face the same degree of wage rigidity.

Keywords: Price rigidity, wage rigidity, factor intensity

JEL Classification: E3

Suggested Citation

Peneva, Ekaterina, Factor Intensity and Price Rigidity: Evidence and Theory (January , 2009). FEDS Working Paper No. 2009-07, Available at SSRN: https://ssrn.com/abstract=1370512 or http://dx.doi.org/10.2139/ssrn.1370512

Ekaterina Peneva (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

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