Inflation adjustment in the open economy: an I(2) analysis of UK prices

TY - JOUR

T1 - Inflation adjustment in the open economy

T2 - an I(2) analysis of UK prices

AU - Nielsen, Heino Bohn

AU - Bowdler, Christopher

N1 - JEL Classification: C32, E31, F0

PY - 2006

Y1 - 2006

N2 - This paper estimates a cointegrated vector autoregressive (VAR) model for UK data on consumer prices, unit labour costs, import prices and real consumption growth. The estimated VAR indicates that the nominal variables are characterised by I(2) trends, and that a linear combination of these processes cointegrate to I(1). This supports an analysis in which I(1) and I(2) restrictions are imposed. A key finding is that an increase in real import prices reduces productivity adjusted real wages, such that the change in domestic inflation is moderated. This may explain why the depreciation of sterling in 1992 left inflation unchanged

AB - This paper estimates a cointegrated vector autoregressive (VAR) model for UK data on consumer prices, unit labour costs, import prices and real consumption growth. The estimated VAR indicates that the nominal variables are characterised by I(2) trends, and that a linear combination of these processes cointegrate to I(1). This supports an analysis in which I(1) and I(2) restrictions are imposed. A key finding is that an increase in real import prices reduces productivity adjusted real wages, such that the change in domestic inflation is moderated. This may explain why the depreciation of sterling in 1992 left inflation unchanged

KW - Faculty of Social Sciences

KW - cointegration

KW - I(2)

KW - inflation

KW - import prices

U2 - 10.1007/s00181-005-0030-9

DO - 10.1007/s00181-005-0030-9

M3 - Journal article

SN - 0377-7332

VL - 31

SP - 569

EP - 586

JO - Empirical Economics

JF - Empirical Economics

IS - 3

ER -