Advanced Search
MyIDEAS: Login to save this paper or follow this series

Wage and price formation in a small open Economy: Evidence from Iceland

Contents:

Author Info

  • Thórarinn G. Pétursson
Registered author(s):

    Abstract

    This paper uses an open economy version of a wage-price model with imperfect competition in goods and labour markets to analyse wage and price inflation in Iceland. The model identifies three main sources of wage and price inflation in Iceland: a conflicting claims channel, a real exchange rate channel, and an excess demand channel. The model explains a large proportion of wage and price inflation during the last three decades and is remarkably stable, considering the fundamental changes in the institutional setup in Iceland during this period. There is some evidence of an upward shift in the equilibrium mark-ups in the late 1980s. The results indicate that this was due to a substantial rise in the cost of capital that reflected the move towards market determined interest rates and a shift in policy priorities towards price stability, which cumulated in a path-breaking labour market agreement in early 1990. These changes led to a downward shift in steady state inflation and an upward shift in the natural rate of unemployment.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sedlabanki.is/uploads/files/wp-16.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp16_thorarinn.

    as in new window
    Length:
    Date of creation: Mar 2002
    Date of revision:
    Handle: RePEc:ice:wpaper:wp16_thorarinn

    Contact details of provider:
    Postal: Kalkofnsvegi 1, 150 Reykjavik
    Phone: 569-9600
    Fax: 569-9605
    Email:
    Web page: http://www.sedlabanki.is/
    More information through EDIRC

    Related research

    Keywords:

    References

    References listed on IDEAS
    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.:
    as in new window
    1. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1492, C.E.P.R. Discussion Papers.
    2. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2002. "Collusion and price rigidity," Discussion Papers, Columbia University, Department of Economics 0102-38, Columbia University, Department of Economics.
    3. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, Elsevier, vol. 43(4-6), pages 801-812, April.
    4. Gordon de Brouwer & Neil R. Ericsson, 1995. "Modelling Inflation in Australia," RBA Research Discussion Papers, Reserve Bank of Australia rdp9510, Reserve Bank of Australia.
    5. Clements, Michael P. & Mizon, Grayham E., 1991. "Empirical analysis of macroeconomic time series : VAR and structural models," European Economic Review, Elsevier, Elsevier, vol. 35(4), pages 887-917, May.
    6. Campos, Julia & Ericsson, Neil R. & Hendry, David F., 1996. "Cointegration tests in the presence of structural breaks," Journal of Econometrics, Elsevier, Elsevier, vol. 70(1), pages 187-220, January.
    7. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
    9. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(2), pages 173-196, July.
    10. Anindya Banerjee & Lynne Cockerell & Bill Russell, 2000. "An I(2) Analysis of Inflation and the Markup," Dundee Discussion Papers in Economics, Economic Studies, University of Dundee 120, Economic Studies, University of Dundee.
    11. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
    12. Benabou, Roland, 1992. "Inflation and markups : Theories and evidence from the retail trade sector," European Economic Review, Elsevier, Elsevier, vol. 36(2-3), pages 566-574, April.
    13. Nickell, Stephen J, 1987. "Why Is Wage Inflation in Britain So High?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(1), pages 103-28, February.
    14. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198284345, October.
    15. Petursson, Thorarinn G, 1998. "Price Determination and Rational Expectations," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 3(2), pages 157-67, April.
    16. Tor Jacobson & Per Jansson & Anders Vredin & Anders Warne, 2001. "Monetary policy analysis and inflation targeting in a small open economy: a VAR approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 16(4), pages 487-520.
    17. Assar Lindbeck, 1993. "Unemployment and Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262121751, December.
    18. Martin, Christopher, 1997. "Price Information in an Open Economy: Theory and Evidence for the United Kingdom, 1951-1991," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(444), pages 1391-1404, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:ice:wpaper:wp16_thorarinn. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Central Bank of Iceland).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.