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The Relationship Between the Markup and Inflation in the G7 Plus One Economies


  • Banerjee, A.
  • Russell, B.


An I(2) analysis of inflation and the markup in undertaken for the G7 economies and Australia. We find that the levels of prices and costs are best described as I(2) processes and that except for Japan a linear combination of the log levels of process and costs cointegrate to the markup that is integrated of order 1. It is shown that the markup in each case cointegrates with inflation and that higher inflation leads to a lower markup on the steady state. The lower markup is interpreted as the higher cost to firms of overcoming missing information.

Suggested Citation

  • Banerjee, A. & Russell, B., 1999. "The Relationship Between the Markup and Inflation in the G7 Plus One Economies," Economics Series Working Papers 99205, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:99205

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    References listed on IDEAS

    1. repec:cup:etheor:v:8:y:1992:i:2:p:188-202 is not listed on IDEAS
    2. Gregoir, Stephane & Laroque, Guy, 1994. "Polynomial cointegration estimation and test," Journal of Econometrics, Elsevier, vol. 63(1), pages 183-214, July.
    3. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    4. Niels Haldrup, 1998. "An Econometric Analysis of I(2) Variables," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 595-650, December.
    5. Johansen, Søren, 1992. "A Representation of Vector Autoregressive Processes Integrated of Order 2," Econometric Theory, Cambridge University Press, vol. 8(02), pages 188-202, June.
    6. Gregoir, Stéphane & Laroque, Guy, 1993. "Multivariate Time Series: A Polynomial Error Correction Representation Theorem," Econometric Theory, Cambridge University Press, vol. 9(03), pages 329-342, June.
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    Cited by:

    1. David F. Hendry, 2001. "Modelling UK inflation, 1875-1991," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 255-275.
    2. Claudio Morana, 2005. "The Japanese deflation: has it had real effects? Could it have been avoided?," Applied Economics, Taylor & Francis Journals, vol. 37(12), pages 1337-1352.
    3. Christopher Bowdler & Eilev S. Jansen, 2004. "Testing for a time-varying price-cost markup in the Euro area inflation process," Economics Papers 2004-W10, Economics Group, Nuffield College, University of Oxford.
    4. Janine Aron & John Muellbauer, 2007. "Inflation dynamics and trade openness: with an application to South Africa," CSAE Working Paper Series 2007-11, Centre for the Study of African Economies, University of Oxford.
    5. Giancarlo Bertocco, 2005. "The Role of credit in a Keynesian monetary economy," Review of Political Economy, Taylor & Francis Journals, vol. 17(4), pages 489-511.
    6. Javier Coto-Martinez & Juan C. Reboredo, 2004. "The Balassa-Samuelson effect in an imperfectly competitive economy: empirical evidence for G7 countries," Money Macro and Finance (MMF) Research Group Conference 2003 19, Money Macro and Finance Research Group.
    7. Christian Müller, 2006. "Further results on monopolistic competition, markup pricing and the business cycle in Switzerland," Empirical Economics, Springer, vol. 31(3), pages 755-776, September.
    8. Anindya Banerjee, 2001. "Industry structure and the dynamics of price adjustment," Applied Economics, Taylor & Francis Journals, vol. 33(15), pages 1889-1901.
    9. Melisso Boschi & Alessandro Girardi, 2007. "Euro area inflation: long-run determinants and short-run dynamics," Applied Financial Economics, Taylor & Francis Journals, vol. 17(1), pages 9-24.
    10. Boschi, Melisso & Girardi, Alessandro, 2005. "Does one monetary policy fit all? the determinants of inflation in EMU countries," MPRA Paper 28554, University Library of Munich, Germany.
    11. Hervé Boulhol, 2005. "Why haven't price-cost margins decreased with globalization ?," Cahiers de la Maison des Sciences Economiques bla06007, Université Panthéon-Sorbonne (Paris 1).

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation


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