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Modelling Traded, Non‐traded and Aggregate Inflation in a Small Open Economy: The Case of Ireland

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  • Geoff Kenny
  • Donal McGettigan

Abstract

This paper addresses the unresolved issues surrounding the determination of Irish inflation. The study tests the validity of (i) a pure wage mark‐up model, (ii) a pure small open economy model and (iii) a hybrid model which fuses elements of (i) and (ii) over the period 1979Q1–1995Q3. Multivariate cointegration techniques are employed to clearly distinguish the long‐run and short‐run information in the data. The results highlight the relevance of the distinction between traded and non‐traded prices. For traded prices, full purchasing power parity (PPP) was found to be consistent with the data. In the case of non‐traded prices, the data reject strict long‐run PPP. Aggregate price results occupy an intermediate position. Finally, we demonstrate that strong bi‐directional feedback exists between prices and wages.

Suggested Citation

  • Geoff Kenny & Donal McGettigan, 1999. "Modelling Traded, Non‐traded and Aggregate Inflation in a Small Open Economy: The Case of Ireland," Manchester School, University of Manchester, vol. 67(1), pages 60-88, January.
    • Handle: RePEc:bla:manchs:v:67:y:1999:i:1:p:60-88
    DOI: 10.1111/1467-9957.00133
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    Cited by:

    1. Kenny, Geoff & Meyler, Aidan & Quinn, Terry, 1998. "Bayesian VAR Models for Forecasting Irish Inflation," MPRA Paper 11360, University Library of Munich, Germany.
    2. Bermingham, Colin & Coates, Dermot & Larkin, John & O'Brien, Derry & O'Reilly, Gerard, 2012. "Explaining Irish Inflation during the Financial Crisis," Economic Letters 13/EL/12, Central Bank of Ireland.
    3. Quinn, Terry & Kenny, Geoff & Meyler, Aidan, 1999. "Inflation Analysis: An Overview," MPRA Paper 11361, University Library of Munich, Germany.
    4. Meyler, Aidan, 1999. "The Non-Accelerating Inflation Rate of Unemployment (NAIRU) in a Small Open Economy: The Irish Context," Research Technical Papers 5/RT/99, Central Bank of Ireland.
    5. Jeannine Bailliu & Daniel Garcés & Mark Kruger & Miguel Messmacher, 2003. "Explaining and Forecasting Inflation in Emerging Markets: The Case of Mexico," Staff Working Papers 03-17, Bank of Canada.
    6. Eleanor Doyle, 2004. "Exchange rate pass-through in a small open economy: the Anglo-Irish case," Applied Economics, Taylor & Francis Journals, vol. 36(5), pages 443-455.
    7. Conall MacCoille & Daniel McCoy, 2002. "Economic Adjustment Within EMU - Ireland’s Experience," The Economic and Social Review, Economic and Social Studies, vol. 33(2), pages 179-193.
    8. Derek Bond & Michael J. Harrison & Edward J. O'Brien, 2006. "Purchasing Power Parity: The Irish Experience Re-visited," Trinity Economics Papers tep200615, Trinity College Dublin, Department of Economics.

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