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Competitiveness, inflation, and monetary policy

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Hashmat Khan
Richhild Moessner

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Abstract

This paper examines the way in which structural changes in the level of steady-state competitiveness and the trend rate of inflation affect inflation responses to monetary policy shocks, in scenarios chosen to capture broadly the conditions of the UK economy in the early 1990s and more recently. Cyclical changes in competitiveness are also considered, since it is not clear empirically whether changes in competitiveness have been predominantly structural or cyclical. A model based on work by Woodford is used, allowing for positive trend inflation and cyclical variations in competitiveness in a tractable manner. This extension enables the separate quantification of the impact of differences in the steady-state level of and cyclical changes in competitiveness on inflation in the short term, in high and low inflation environments. The paper quantifies the extent to which procyclical (countercyclical) changes in competitiveness dampen (amplify) the impulse responses of inflation to a given monetary policy shock. In the calibration used, the inflation response to monetary policy shocks in a low inflation/high competitiveness environment is dampened compared with a high inflation/low competitiveness environment. By contrast, inflation responses to monetary policy shocks in a low inflation/low competitiveness environment are similar to those in a high inflation/high competitiveness environment.

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Paper provided by Bank of England in its series Bank of England working papers with number 246.

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hasan Bakhshi & Pablo Burriel-Llombart & Hashmat Khan & Barbara Rudolf, . "Endogenous price stickiness, trend inflation, and the New Keynesian Phillips curve," Bank of England working papers 191, Bank of England. [Downloadable!]
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  2. Benabou, Roland, 1992. "Inflation and Efficiency in Search Markets," Review of Economic Studies, Blackwell Publishing, vol. 59(2), pages 299-329, April. [Downloadable!] (restricted)
  3. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December. [Downloadable!] (restricted)
  4. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  5. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer, vol. 20(1-2), pages 1-20, October. [Downloadable!]
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  6. Julio J. Rotemberg & Michael Woodford, 1991. "Markups and the Business Cycle," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 63-140 National Bureau of Economic Research, Inc. [Downloadable!]
  7. Robert G. King & Alexander L. Wolman, 1996. "Inflation Targeting in a St. Louis Model of the 21st Century," NBER Working Papers 5507, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Erik Britton & Jens D J Larsen & Ian Small, . "Imperfect competition and the dynamics of mark-ups," Bank of England working papers 110, Bank of England. [Downloadable!]
  9. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March. [Downloadable!] (restricted)
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  10. Ball, Laurence & Romer, David, 2003. " Inflation and the Informativeness of Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 177-96, April.
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  11. Benabou, Roland, 1992. "Inflation and markups : Theories and evidence from the retail trade sector," European Economic Review, Elsevier, vol. 36(2-3), pages 566-574, April. [Downloadable!] (restricted)
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  12. Peter N. Ireland, 2004. "Technology Shocks in the New Keynesian Model," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 923-936, 01. [Downloadable!] (restricted)
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  13. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-77, November. [Downloadable!] (restricted)
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  14. Julio J. Rotemberg, 2002. "Customer Anger at Price Increases, Time Variation in the Frequency of Price Changes and Monetary Policy," NBER Working Papers 9320, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Ascari, Guido, 2002. "Staggered Price and Trend Inflation:Some Nuisances," Royal Economic Society Annual Conference 2002 10, Royal Economic Society. [Downloadable!]
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  16. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 183-203, April. [Downloadable!] (restricted)
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  17. Hasan Bakhshi & Hashmat Khan & Barbara Rudolf, . "The Phillips curve under state-dependent pricing," Bank of England working papers 227, Bank of England. [Downloadable!]
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  18. Frank Smets & Rafael Wouters, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 171, European Central Bank. [Downloadable!]
  19. Blanchard, Olivier J & Giavazzi, Francesco, 2001. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labour Markets," CEPR Discussion Papers 2713, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  20. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
  21. Hashmat Khan, . "Price-setting behaviour, competition, and mark-up shocks in the New Keynesian model," Bank of England working papers 240, Bank of England. [Downloadable!]
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  22. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1988-1), pages 1-82. [Downloadable!]
  23. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc. [Downloadable!]
  24. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December. [Downloadable!] (restricted)
  25. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Cogley, Timothy W. & Sbordone, Argia M., 2005. "A Search for a Structural Phillips Curve," Working Papers 05-10, University of California at Davis, Department of Economics. [Downloadable!]
    Other versions:
  2. Hashmat Khan, . "Price-setting behaviour, competition, and mark-up shocks in the New Keynesian model," Bank of England working papers 240, Bank of England. [Downloadable!]
    Other versions:
  3. Colin Ellis, . "Elasticities, markups and technical progress: evidence from a state-space approach," Bank of England working papers 300, Bank of England. [Downloadable!]
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