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Inflation, Markups and Monetary Policy

Author

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  • Jonsson, Magnus

    (Research Department, Central Bank of Sweden)

  • Palmqvist, Stefan

    (Monetary Policy Department, Central Bank of Sweden)

Abstract

The correlation between persistent changes in the markup in one sector of an economy and the inflation rate is quantified in a 2-sector dynamic general equilibrium model. How this relationship is affected by monetary policy is also studied. We find that the correlation is in general positive under an exogenous money growth rule as well as under an inflation targeting rule. That is, a decrease of the markup leads to a decrease in the CPI-inflation rate. However, if inflation is measured by an optimal price index that also includes the wage rate the correlation is slightly negative. That is, a decrease in the markup leads to higher inflation rates. This is due to higher wage rates. The correlation is sensitive to whether the policy rule includes an output term. If monetary policy accommodates output strongly the correlation is negative. A decrease in the markup leads to higher inflation rates, as measured by both the CPI and the optimal price index.

Suggested Citation

  • Jonsson, Magnus & Palmqvist, Stefan, 2003. "Inflation, Markups and Monetary Policy," Working Paper Series 148, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0148
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    References listed on IDEAS

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    Cited by:

    1. Marco Antonio Vega de la Cruz & Diego Winkelried Quezada, 2004. "El efecto arrastre de la inflación mundial en economías pequeñas y abiertas," Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez", Centro de Estudios Monetarios Latinoamericanos, CEMLA, number prg2004, July-Dece.
    2. Marco Antonio Vega de la Cruz & Diego Winkelried Quezada, 2004. "The Dragging Effect of World Inflation in Small Open Economies," Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez", Centro de Estudios Monetarios Latinoamericanos, CEMLA, number prg2004eng, July-Dece.
    3. Marco Vega & Diego Winkelried, 2004. "How Does Global Disinflation Drag Inflation in Small Open Economies?," Macroeconomics 0403008, University Library of Munich, Germany.

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    More about this item

    Keywords

    Price indices; monopolistic competition; monetary policy rules;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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