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Domestic and Foreign Effects on Prices in an Open Economy

Author

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  • Katarina Juselius

    (Institute of Economics, University of Copenhagen)

Abstract

The domestic price determination in Denmark is investigated based on three kinds of macro economic explanations: (i) internal labour market theories, describing the relation between price and wage inflation, (ii) pure monetarist theories, describing the effect of excess money on the inflation rate, and finally (iii) external theories, describing the foreign transmission effects on a small open economy. The empirical analysis makes use of the multivariate cointegration model which is based on the joint analysis of long and short run behaviour. The deviations from derived underlying steady-states in each sector were found to be the main determinants to the inflation rate. Among these the domestic effects were small compared to the foreign effects. The empirical results strongly favoured a backward looking behavioural model in terms of structurally stable parameters as opposed to a forward expectations model. The results stand up as quite strong evidence against the famous Lucas' critique.

Suggested Citation

  • Katarina Juselius, 1991. "Domestic and Foreign Effects on Prices in an Open Economy," Discussion Papers 91-05, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:9105
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    Citations

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    Cited by:

    1. Mame Astou Diouf, 2007. "Modeling Inflation for Mali," IMF Working Papers 2007/295, International Monetary Fund.
    2. Neil R. Ericsson & Steven B. Kamin, 2008. "Constructive data mining: modeling Argentine broad money demand," International Finance Discussion Papers 943, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    monetary growth models; open economy; Denmark; prices;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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