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An I(2) Analysis of Inflation and the Markup

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  • Anindya Banerjee
  • Lynne Cockerell
  • Bill Russell

Abstract

An I(2) analysis of Australian inflation and the markup is undertaken within an imperfect competition model. It is found that the levels of prices and costs are best characterized as integrated of order 2 and that a linear combination of the levels (which may be defined as the markup) cointegrates with price inflation. From the empirical analysis we obtain a long-run relationship where higher inflation is associated with a lower markup and vice versa. The impact in the long run of inflation on the markup is interpreted as the cost to firms of overcoming missing information when adjusting prices in an inflationary environment. Copyright © 2001 John Wiley & Sons, Ltd.

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Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 120.

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Date of creation: Dec 2000
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Handle: RePEc:dun:dpaper:120

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  1. Bill RUSSELL & Jonathan EVANS & Bruce PRESTON, 2002. "The Impact of Inflation and Uncertainty on the Optimum Markup Set by Firms," Economics Working Papers ECO2002/02, European University Institute.
  2. Franz, Wolfgang & Gordon, Robert J, 1993. "German and American Wage and Price Dynamics: Differences and Common Themes," CEPR Discussion Papers 777, C.E.P.R. Discussion Papers.
  3. Benabou, R., 1991. "Inflation and Markups: Theories and Evidence from the Retail Trade Sector," Working papers 587, Massachusetts Institute of Technology (MIT), Department of Economics.
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  6. Engsted, Tom & Haldrup, Niels, 1999. " Multicointegration in Stock-Flow Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(2), pages 237-54, May.
  7. Gultekin, N Bulent, 1983. " Stock Market Returns and Inflation: Evidence from Other Countries," Journal of Finance, American Finance Association, vol. 38(1), pages 49-65, March.
  8. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
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  13. Franz, Wolfgang & Gordon, Robert J., 1993. "German and American wage and price dynamics: Differences and common themes," Discussion Papers 2, University of Konstanz, Center for International Labor Economics (CILE).
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  20. Clara Jørgensen & Hans Christian Kongsted & Anders Rahbek, 1996. "Trend-Stationarity in the I(2) Cointegration Model," Discussion Papers 96-12, University of Copenhagen. Department of Economics.
  21. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  22. Gregoir, Stéphane & Laroque, Guy, 1993. "Multivariate Time Series: A Polynomial Error Correction Representation Theorem," Econometric Theory, Cambridge University Press, vol. 9(03), pages 329-342, June.
  23. Johansen, S., 1991. "A Statistical Analsysis of Cointegration for I(2) Variables," Papers 77, Helsinki - Department of Economics.
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  25. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
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  27. Yu-Fu Chen & Bill Russell, 1998. "A Profit Maximising Model Of Disequilibrium Price Adjustment With Missing Information," Dundee Discussion Papers in Economics 092, Economic Studies, University of Dundee.
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