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 pri...
| Main Authors: | , |
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| Format: | Working paper |
| Language: | English |
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Nuffield College (University of Oxford)
2003
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| _version_ | 1797064795616182272 |
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| author | Nielsen, H Bowdler, C |
| author_facet | Nielsen, H Bowdler, C |
| author_sort | Nielsen, H |
| collection | OXFORD |
| description | 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. |
| first_indexed | 2024-03-06T21:19:29Z |
| format | Working paper |
| id | oxford-uuid:40f47f1b-d399-4ae0-ba7b-eff77b41b946 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-06T21:19:29Z |
| publishDate | 2003 |
| publisher | Nuffield College (University of Oxford) |
| record_format | dspace |
| spelling | oxford-uuid:40f47f1b-d399-4ae0-ba7b-eff77b41b9462022-03-26T14:40:49ZInflation Adjustment in the Open Economy: An I(2) Analysis of UK Prices.Working paperhttp://purl.org/coar/resource_type/c_8042uuid:40f47f1b-d399-4ae0-ba7b-eff77b41b946EnglishDepartment of Economics - ePrintsNuffield College (University of Oxford)2003Nielsen, HBowdler, CWe 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. |
| spellingShingle | Nielsen, H Bowdler, C Inflation Adjustment in the Open Economy: An I(2) Analysis of UK Prices. |
| title | Inflation Adjustment in the Open Economy: An I(2) Analysis of UK Prices. |
| title_full | Inflation Adjustment in the Open Economy: An I(2) Analysis of UK Prices. |
| title_fullStr | Inflation Adjustment in the Open Economy: An I(2) Analysis of UK Prices. |
| title_full_unstemmed | Inflation Adjustment in the Open Economy: An I(2) Analysis of UK Prices. |
| title_short | Inflation Adjustment in the Open Economy: An I(2) Analysis of UK Prices. |
| title_sort | inflation adjustment in the open economy an i 2 analysis of uk prices |
| work_keys_str_mv | AT nielsenh inflationadjustmentintheopeneconomyani2analysisofukprices AT bowdlerc inflationadjustmentintheopeneconomyani2analysisofukprices |