Prices, output, and hours: An empirical analysis based on a sticky price model

I show that a simple sticky price model based on Rotemberg (1982) is consistent with a variety of facts concerning the correlation of prices, hours, and output. It is consistent with the negative correlation between forecastable movements in prices and output as well as the smaller negative correlation between forecastable movements in prices and hours. It is also consistent with the positive correlations of unexpected movements in prices, output, and hours. These patterns are harder to reconcile with the flexible price version of the model. In particular, they require that money respond differently to forecastable and to unforecastable real shocks.