Inflation Adjustment in the Open Economy: An I(2) Analysis of UK Prices
We analyse a cointegrated VAR comprising UK data on consumer prices, unit labour costs, import prices and real consumption growth. The nominal variables, treated as I(2) here, form a linearly homogeneous relation, suggesting a transformation of the system to one comprising inflation and relative prices. This is then estimated in I(1) space. An impulse response analysis using the results suggests that higher real import prices reduce real wages, such that the impact of an external shock on domestic inflation is moderated. This explains why the depreciation of sterling in 1992 left inflation unchanged. In contrast, high real import prices in 1974 increased inflation because wage accommodation effects were absent.
|Date of creation:||13 Mar 2003|
|Date of revision:|
|Contact details of provider:|| Web page: https://www.nuffield.ox.ac.uk/economics/|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Heino Bohn Nielsen, 2004. "Cointegration analysis in the presence of outliers," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 249-271, 06.
- Jacobson, Tor & Vredin, Anders & Warne, Anders, 1994.
"Are Real Wages and Unemployment Related?,"
SSE/EFI Working Paper Series in Economics and Finance
8, Stockholm School of Economics.
- repec:cup:etheor:v:23:y:2007:i:04:p:615-637 is not listed on IDEAS
- Anindya Banerjee & Lynne Cockerell & Bill Russell, 2001.
"An I(2) analysis of inflation and the markup,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 16(3), pages 221-240.
- Anindya Banerjee & Lynne Cockerell & Bill Russell, 2000. "An I(2) Analysis of Inflation and the Markup," Dundee Discussion Papers in Economics 120, Economic Studies, University of Dundee.
- Banerjee, A. & Cockerell, L. & Russell, B., 1998. "An I(2) Analysis of Inflation and the Markup," Economics Series Working Papers 99203, University of Oxford, Department of Economics.
- Clara Jørgensen & Hans Christian Kongsted & Anders Rahbek, 1996.
"Trend-Stationarity in the I(2) Cointegration Model,"
96-12, University of Copenhagen. Department of Economics.
- Rahbek, Anders & Christian Kongsted, Hans & Jorgensen, Clara, 1999. "Trend stationarity in the I(2) cointegration model," Journal of Econometrics, Elsevier, vol. 90(2), pages 265-289, June.
- Gredenhoff, Mikael & Jacobson, Tor, 2001. "Bootstrap Testing Linear Restrictions on Cointegrating Vectors," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 63-72, January.
- Nielsen, Heino Bohn & Rahbek, Anders, 2007. "The Likelihood Ratio Test For Cointegration Ranks In The I(2) Model," Econometric Theory, Cambridge University Press, vol. 23(04), pages 615-637, August.
- Anindya Banerjee & Bill Russell, 2000. "The Relationship between the Markup and Inflation in the G7 Economies and Australia," Dundee Discussion Papers in Economics 119, Economic Studies, University of Dundee.
- Batini, Nicoletta & Jackson, Brian & Nickell, Stephen, 2005. "An open-economy new Keynesian Phillips curve for the U.K," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1061-1071, September.
- Nielsen, Bent & Rahbek, Anders, 2000. " Similarity Issues in Cointegration Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(1), pages 5-22, February.
- Li, Hongyi & Maddala, G. S., 1997.
"Bootstrapping cointegrating regressions,"
Journal of Econometrics,
Elsevier, vol. 80(2), pages 297-318, October.
- Tom Doan, . "RATS program to demonstrate bootstrapping with cointegration," Statistical Software Components RTZ00021, Boston College Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:nuf:econwp:0305. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maxine Collett)
If references are entirely missing, you can add them using this form.