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Causality Links between Consumer and Producer Prices: Some Empirical Evidence

  • Guglielmo Maria Caporale

    ()

    (Centre for Monetary and Financial Economics, South Bank University London)

  • Margarita Katsimi

    (Department of International and European Economic Studies, Athens University of Economics and Business)

  • Nikitas Pittis

    (Department of Financial Management and Banking, University of Piraeus)

This paper reexamines the relationship between consumer and producer prices in the G7 countries (United States, Canada, Germany, France, Italy, United Kingdom, and Japan), and it improves on the existing literature in two ways. First, it takes into account causality links arising from the transmission mechanism of monetary policy, which are generally overlooked. Second, it employs the causality testing method for unstable systems recently introduced by, which results in standard asymptotics, thereby obtaining valid statistical inference. The empirical results are consistent with the conventional wisdom according to which there is unidirectional causality running from producer to consumer prices, bidirectional causality (or even no significant links) only being found when the causality links reflecting the monetary transmission mechanism are ignored.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 68 (2002)
Issue (Month): 3 (January)
Pages: 703-711

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Handle: RePEc:sej:ancoec:v:68:3:y:2002:p:703-711
Contact details of provider: Web page: http://www.southerneconomic.org/

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