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

Author

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  • Christopher Bowdler

    (Nuffield College, University of Oxford)

  • 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.

Suggested Citation

  • Christopher Bowdler & Eilev S. Jansen, 2004. "Testing for a time-varying price-cost markup in the Euro area inlation process," Working Paper 2004/9, Norges Bank.
    • Handle: RePEc:bno:worpap:2004_09
    Note: This is a revised version of ECB Working Paper 306 (Bowdler and Jansen (2004)), which was written while the second author was a Research Visitor to DG Research, European Central Bank, Frankfurt, from February through June 2003. The work benefitted greatly from a one week visit from the first author to the same institution in May 2003. The first author acknowledges financial support from a British Academy post-doctoral fellowship. The revision has been carried out while the second author was visiting Department of Economics, University of California San Diego. The hospitality and excellent working conditions offered there are gratefully acknowledged. We are also grateful for the constructive criticism provided by an anonymous ECB referee, and for comments from James Hamilton, Heino Bohn Nielsen and seminar participants at Norges Bank, University of California San Diego and Brunel University. The views expressed in this paper represent exclusively the views of the authors and do not necessarily reflect those of the European Central Bank or Norges Bank.
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    References listed on IDEAS

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    Cited by:

    1. Eilev S. Jansen, 2004. "Modelling inflation in the Euro Area," Working Paper Series 4104, Department of Economics, Norwegian University of Science and Technology, revised 01 Jun 2004.
    2. J.W. Fedderke & E. Schaling, 2005. "Modelling Inflation In South Africa: A Multivariate Cointegration Analysis," South African Journal of Economics, Economic Society of South Africa, vol. 73(1), pages 79-92, March.
    3. Nir Klein, 2011. "South Africa: The Cyclical Behavior of the Markups and its Implications for Monetary Policy," IMF Working Papers 2011/204, International Monetary Fund.

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    More about this item

    Keywords

    inflation; price-cost markup; cointegration; time-varying intercept; dynamic modelling.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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