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An I(2) Analysis of Inflation and the Markup

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  • Banerjee, A.
  • Cockerell, L.
  • Russell, B.

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 characterised as integrated of order 2 and that the levels cointegrate to the markup which is integrated of order 1. A further cointegrating relationship is found to exist where higher price inflation results in a lower markup in the steady state. The negative correlation between inflation and the markup is interpreted as the cost to firms of overcoming missing information when adjusting prices in an inflationary environment.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 99203.

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Length: 42 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:oxf:wpaper:99203

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Keywords: INFLATION ; AUSTRALIA;

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References

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  1. Rahbek, Anders & Christian Kongsted, Hans & Jorgensen, Clara, 1999. "Trend stationarity in the I(2) cointegration model," Journal of Econometrics, Elsevier, vol. 90(2), pages 265-289, June.
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  6. repec:cup:etheor:v:8:y:1992:i:2:p:188-202 is not listed on IDEAS
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  8. 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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