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Non-Stationary Inflation and the Markup: an Overview of the Research and some Implications for Policy

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  • Bill Russell

Abstract

This paper reports on research into the negative relationship between inflation and the markup. It is argued that this relationship can be thought of as ‘long-run’ in nature which suggests that inflation has a persistent effect on the markup and, therefore, the real wage. A ‘rule of thumb’ from the estimates indicate that a 10 percentage point increase in inflation (as occurred worldwide in the 1970s) is associated with around a 7 per cent fall in the markup accompanied by a similar increase in the real wage. It is argued that movements of this magnitude in the markup and the real wage will have important implications for a range of economic outcomes such as unemployment, employment and investment.

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File URL: http://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_191.pdf
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Bibliographic Info

Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 191.

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Length: 28 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:dun:dpaper:191

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Postal: Dundee, DD1 4HN
Phone: (01382) 344375
Fax: (01382) 344691
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Web page: http://www.dundee.ac.uk/econman/
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Related research

Keywords: Inflation; Wages; Prices; Markup; Monetary Policy; Competition;

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References

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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.:
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  1. 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).
  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. Pindyck, Robert S. & Solimano, Andrés., 1993. "Economic instability and aggregate investment," Working papers 3552-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Diamond, Peter A, 1993. "Search, Sticky Prices, and Inflation," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 53-68, January.
  5. Chatterjee, Satyajit & Cooper, Russell, 1989. "Multiplicity of Equilibria and Fluctuations in Dynamic Imperfectly Competitive Economies," American Economic Review, American Economic Association, vol. 79(2), pages 353-57, May.
  6. Johansen, S., 1991. "A Statistical Analsysis of Cointegration for I(2) Variables," Papers 77, Helsinki - Department of Economics.
  7. Benabou, R. & Konieczny, J.D., 1993. "On Inflation and Output with Costly Price Changes: A Simple Unifying Result," Working Papers 93006, Wilfrid Laurier University, Department of Economics.
  8. Carlin, Wendy & Soskice, David, 1990. "Macroeconomics and the Wage Bargain: A Modern Approach to Employment, Inflation, and the Exchange Rate," OUP Catalogue, Oxford University Press, number 9780198772446.
  9. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 317-349, 04.
  10. Banerjee, A. & Cockerell, L. & Russell, B., 1998. "An I(2) Analysis of Inflation and the Markup," Economics Series Working Papers 99203, University of Oxford, Department of Economics.
  11. Kuran, Timur, 1986. "Price Adjustment Costs, Anticipated Inflation, and Output," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 407-18, May.
  12. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  13. Yu-Fu CHEN & Bill RUSSELL, 2002. "An Optimising Model of Price Adjustment with Missing Information," Economics Working Papers ECO2002/03, European University Institute.
  14. Naish, Howard F, 1986. "Price Adjustment Costs and the Output-Inflation Trade-off," Economica, London School of Economics and Political Science, vol. 53(210), pages 219-30, May.
  15. Danziger, Leif, 1988. "Costs of Price Adjustment and the Welfare Economics of Inflation and Disinflation," American Economic Review, American Economic Association, vol. 78(4), pages 633-46, September.
  16. Konieczny, Jerzy D, 1990. "Inflation, Output and Labour Productivity When Prices Are Changed Infrequently," Economica, London School of Economics and Political Science, vol. 57(226), pages 201-18, May.
  17. 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.
  18. Paruolo, Paolo, 1996. "On the determination of integration indices in I(2) systems," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 313-356.
  19. Parkin, Michael, 1986. "The Output-Inflation Trade-off When Prices Are Costly to Change," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 200-224, February.
  20. Anindya Banerjee & Bill Russell, 2006. "A markup model for forecasting inflation for the euro area," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 25(7), pages 495-511.
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Citations

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Cited by:
  1. Bill Russell, 2007. "Non-Stationary Inflation and Panel Estimates of United States Short and Long-run Phillips curves," Dundee Discussion Papers in Economics 200, Economic Studies, University of Dundee.
  2. Russell, Bill & Banerjee, Anindya, 2008. "The long-run Phillips curve and non-stationary inflation," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1792-1815, December.
  3. Bill Russell & Anindya Banerjee & Issam Malki & Natalia Ponomareva, 2010. "A Multiple Break Panel Approach to Estimating United States Phillips Curves," Discussion Papers 10-14, Department of Economics, University of Birmingham.
  4. Bill Russell, 2013. "ARCH and structural breaks in United States inflation," Dundee Discussion Papers in Economics 277, Economic Studies, University of Dundee.

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