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Testing for a time-varying price-cost markup in the Euro area inflation process

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Author Info
Christopher Bowdler (University of Oxford)
Eilev Jansen (Norges Bank, Norwegian University of Science and Technology)

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Abstract

Empirical models of inflation often incorporate equilibrium correction effects based upon levels of prices and input costs. Such models assume that the steady-state price-cost markup is constant, but recent research suggests that this may not be true for the Euro area economy, which has undergone major structural reforms over the last 25 years. We allow for permanent shifts in the markup factor through estimating an inflation equation that includes a time-varying intercept. The model suggests that a reduction in the markup contributed to disinflation in the Euro area during the period 1981-2000.

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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number 2004-07.

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Date of creation: 29 Sep 2004
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Handle: RePEc:cdl:ucsdec:2004-07

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Keywords: Inflation; price-cost markup; cointegration; time-varying intercept; dynamic modelling;

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  15. Nath, Hiranya K., 2004. "Inflation and relative price variability: short-run vs. long-run," Economics Letters, Elsevier, vol. 82(3), pages 363-369, March. [Downloadable!] (restricted)
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  1. Eilev S. Jansen, 2004. "Modelling inflation in the Euro Area," Working Paper 2004/10, Norges Bank. [Downloadable!]
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