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Does product market competition reduce inflation? Evidence from EU countries and sectors

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  • Przybyla, Marcin
  • Roma, Moreno

Abstract

In this paper we explore the link between the intensity of product market competition and inflation rates across EU countries and sectors. We consider long-term averages of inflation rates in order to remove the cyclical behavior of inflation over time and as alternative proxies of competition we use the level of mark-up, profit margin, the profit rate and a survey based "intensity of competition" variable. Results for both aggregate and sectoral panels show that the extent of product market competition, as proxied by the level of mark-up in particular, is an important driver of inflation. Notwithstanding some caveats associated with the measurement of the proxies of competition used, our findings suggest that higher product market competition reduces average inflation rates for a prolonged period of time. Moreover, results both at the aggregate and sectoral level are generally confirmed by a wide set of robustness tests. JEL Classification: C21, C23, E31

Suggested Citation

  • Przybyla, Marcin & Roma, Moreno, 2005. "Does product market competition reduce inflation? Evidence from EU countries and sectors," Working Paper Series 453, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2005453
    Note: 475547
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp453.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    competition; Estimation and Panel Data Analysis; inflation;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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