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Dynamic Modelling of Domestic Prices with Time-varying Elasticities and Rational Expectations

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Abstract

The paper analyses the price on domestic market for an aggregate commodity produced by Norwegian private mainland economy. The long-run solution is modelled assuming imperfect competition. The elasticities with respect to unit labour costs and competing prices vary with an indicator for competitive strength in domestic market. I consider two models for the dynamic part of the equation. Model A is a conditional ECM in current and lagged variables. Model B is derived from a multiperiod quadratic loss function which introduces rational expectations to the model. The backward-forward restrictions are not rejected. The estimated elasticities for both models are in line with the previous empirical results for the Norwegian economy. Model A is preferred to Model B, partly on the basis of informal encompassing results.

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  • Ingvild Svendsen, 1995. "Dynamic Modelling of Domestic Prices with Time-varying Elasticities and Rational Expectations," Discussion Papers 151, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:151
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    More about this item

    Keywords

    Domestic prices; Imperfect competition; Time-varying elasticities; Multiperiod loss function; Rational expectations; Error correction models;
    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
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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