Econometrica: Jul, 1978, Volume 46, Issue 4

Testing Price Equations for Stability Across Spectral Frequency Bands

https://doi.org/0012-9682(197807)46:4<869:TPEFSA>2.0.CO;2-C
p. 869-881

Robert F. Engle

A set of standard dynamic disaggregated price equations are estimated to examine the relationship between changes in input prices and output prices. The equations perform satisfactorily by conventional criteria; however, when disaggregated by frequency, it is found that the high and low frequency components appear to satisfy different models. The differences are generally significant suggesting that the model is misspecified and that another lag distribution should be used. In particular, the sum of the lag coefficients for labor inputs is substantially larger when estimated with the low frequency component than the high. Therefore, such a price equation estimated during a regime of continued wage inflation would exhibit a much larger long run output price elasticity with respect to wages, than would one estimated during a period of stable or randomly fluctuating wages.