We analyse a cointegrated VAR comprising UK data on consumer prices, unit labour costs, import prices and real consumption growth. The nominal variables, treated as I(2) here, form a linearly homogeneous relation, suggesting a transformation of the system to one comprising inflation and relative prices. This is then estimated in I(1) space. An impulse response analysis using the results suggests that higher real import prices reduce real wages, such that the impact of an external shock on domestic inflation is moderated. This explains why the depreciation of sterling in 1992 left inflation unchanged. In contrast, high real import prices in 1974 increased inflation because wage accommodation effects were absent.
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number
2003-W05.
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.:
Jacobson, Tor & Vredin, Anders & Warne, Anders, 1998.
"Are Real Wages and Unemployment Related?,"
Economica,
London School of Economics and Political Science, vol. 65(257), pages 69-96, February.
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