Modelling Traded, Non-traded and Aggregate Inflation in a Small Open Economy: The Case of Ireland
This paper addresses the unresolved issues surrounding the determination of fish inflation. The study tests the validity of (l) a pure wage mark-up model, (2) a pure small open economy model, and (3) a hybrid model which fuses elements of (1) and (2) over the period 1979:Q1-1995:Q3. Multivariate cointegration techniques are employed to clearly distinguish the long- and the short-run information in the data. The results highlight the relevance of the distinction between traded and nontraded prices. For traded prices, full purchasing power parity (PPP) was found to be consistent with the data. In the case of nontraded prices, the data reject strict long-run PPP. Aggregate price results occupy an intermediate position. Finally, the paper demonstrates that strong bidirectional feedback exists between prices and wages. Copyright 1999 by Blackwell Publishers Ltd and The Victoria University of Manchester
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Volume (Year): 67 (1999)
Issue (Month): 1 (January)
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