Template-type: ReDIF-Paper 1.0
Author-Name: Heino Bohn Nielsen
Author-Email: heino.nielsen@econ.ku.dk
Author-Workplace-Name: University of Copenhagen, Denmark
Author-Name: Christopher Bowdler
Author-Email: christopher.bowdler@nuffield.ox.ac.uk
Author-Workplace-Name: Nuffield College, Oxford University
Author-Workplace-Homepage:http://www.nuff.ox.ac.uk/
Title: Inflation Adjustment in the Open Economy: An I(2) Analysis of UK Prices
Abstract:
  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.
Classification-JEL: C32, C51, C53, E31, F0
Keywords: I(2), Impulse response analysis, Inflation, Import price shock
Length:22 pages
Creation-Date: 2003-03-13
Number:2003-W05
File-URL:http://www.nuff.ox.ac.uk/economics/papers/2003/W5/UKI(2).pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:0305