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Forward Looking Price Setting in UK Manufacturing

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  • Price, Simon

Abstract

Given an equilibrium pricing rule, minimization of a multiperiod quadratic cost function yields a precise specification for the weights on the leads and lags of a dynamic pricing equation. Using an equilibrium (cointegrating) vector, the theoretical specification is found to fit the U.K. manufacturing data remarkably well. Non-nested tests fail to reject either the (backward looking) error correction or the forward looking model against the alternative (so long as dynamic homogeneity is imposed in the error correction model). This is consistent with the notion that the error correction model is conflating the true structural model (which is forward looking) with the expectation formation process. Copyright 1992 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 102 (1992)
Issue (Month): 412 (May)
Pages: 497-505

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Handle: RePEc:ecj:econjl:v:102:y:1992:i:412:p:497-505

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Cited by:
  1. Tinsley, P A, 2002. "Rational Error Correction," Computational Economics, Society for Computational Economics, vol. 19(2), pages 197-225, April.
  2. Luca Fanelli, 2006. "Testing the New Keynesian Phillips Curve through Vector Autoregressive models : Results from the Euro area," Quaderni di Dipartimento 0, Department of Statistics, University of Bologna.
  3. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  4. Ingvild Svendsen, 1998. "Rational Expectations in Price Setting. Tests Based on Norwegian Export Prices," Discussion Papers 226, Research Department of Statistics Norway.
  5. Peter N. Ireland, 2000. "Sticky-Price Models of the Business Cycle: Specification and Stability," NBER Working Papers 7511, National Bureau of Economic Research, Inc.
  6. Smith, Peter N., 2000. "Output price determination and the business cycle," Economic Modelling, Elsevier, vol. 17(1), pages 49-69, January.
  7. Fanelli, Luca, 2006. "Multi-equational linear quadratic adjustment cost models with rational expectations and cointegration," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 445-456, March.
  8. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, vol. 22(1), pages 39-59, January.
  9. Murray, Jonathan & Sarantis, Nicholas, 1999. "Quality, user cost, forward-looking behavior, and the demand for cars in the UK," Journal of Economics and Business, Elsevier, vol. 51(3), pages 237-258, May.
  10. Colin Ellis & Simon Price, 2003. "The impact of price competitiveness on UK producer price behaviour," Bank of England working papers 178, Bank of England.
  11. Fanelli, Luca, 2002. "A new approach for estimating and testing the linear quadratic adjustment cost model under rational expectations and I(1) variables," Journal of Economic Dynamics and Control, Elsevier, vol. 26(1), pages 117-139, January.
  12. Valerie Herzberg & George Kapetanios & Simon Price, 2003. "Import prices and exchange rate pass-through: theory and evidence from the United Kingdom," Bank of England working papers 182, Bank of England.
  13. Binder, Michael & Pesaran, Hashem, 2000. "Solution of finite-horizon multivariate linear rational expectations models and sparse linear systems," Journal of Economic Dynamics and Control, Elsevier, vol. 24(3), pages 325-346, March.
  14. Yew-Kwang Ng & Ying Wu, 2004. "Multiple Equilibria and Interfirm Macro-Externality: An Analysis of Sluggish Real Adjustment," Annals of Economics and Finance, Society for AEF, vol. 5(1), pages 61-77, May.

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