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Factor Intensity And Price Rigidity: Evidence And Theory

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Executive Summary

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.

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