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

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

Author Info

Christopher Bowdler () (Nuffield College, Oxford University, UK)
Eilev S. Jansen (Norges Bank and Norwegian University of Science and Technology)

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 Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2004-W10.

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Length: 18 pages
Date of creation: 30 Apr 2004
Date of revision:
Handle: RePEc:nuf:econwp:0410

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-05-26 (All new papers)
NEP-EEC-2004-05-26 (European Economics)
NEP-MON-2004-05-16 (Monetary Economics)

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