Introduction

In our earlier paper (Ando, Brayton and Kennickell, 1991) we reported on the performance of the price–wage sector of the MPS model (one of the models maintained at the Board of Governors of the Federal Reserve System) between the late 1960s and 1990 and supplemented the analysis with a series of tests designed to check if the specification of this part of the model was missing any direct effects of the money supply on the movements of prices and wages.

We have two purposes in writing the present chapter. First, listening to the reaction from readers of our earlier paper, it is evident that we have failed to communicate our basic message, especially the theoretical framework underlying our empirical results. By taking advantage of the parallel work of Layard and Nickell (Layard and Nickell, 1985 and 1986, hereafter LN) and constrasting our formulation with theirs, we hope to clarify the basic features of both structures. Our second objective is to elaborate and reinforce our earlier empirical results, embedding our price–wage equations in a somewhat broader context, offering alternative algebraic formulations of the same hypotheses to demonstrate their robustness, extending the time period covered and improving our statistical procedures slightly.

In the second section of this chapter, we show what these two formulations say about the behaviour of wages, prices and employment on the steady state growth path. In the third section, we proceed to review the dynamic adjustment processes and also the ability of our formulation to account for the pattern of actual data in the US.