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

  • Bowdler, Christopher
  • Jansen, Eilev S.

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 Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt4s75w541.

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Date of creation: 01 May 2004
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Handle: RePEc:cdl:ucsdec:qt4s75w541
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  18. Gwin, Carl R & Taylor, Beck A, 2004. "The Role of Search Costs in Determining the Relationship between Inflation and Profit Margins," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 139-49, February.
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