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Price-Wage System with Taxation: Multivariate Cointegration Analysis

Author

Listed:
  • Aleksander Welfe

    (Chair of Econometric Models and Forecasts, University of Lodz)

  • Piotr Keblowski

    (Chair of Econometric Models and Forecasts, University of Lodz)

Abstract

The paper investigates the price system and the wage equation in the presence of taxes. Price formation is analysed at three levels: producer’s prices, trade in consumer goods and, separately, in services, and at the aggregate level of the cost of living index. This is in the spirit of classical macromodels that usually apply the “bottom-to-top” approach. However, because of nonstationarity of variables, this study employs multivariate cointegration. The empirical investigation is based on Polish monthly data covering the period from January 1993 to December 2003. Its results allow to conclude that as many as five stable long-run relationships drove inflation in Poland in that period. Appropriate decomposition of price formation made it possible to incorporate all conditions postulated by economic theory (i.e. homogeneity, unit elasticities) and to show how direct and indirect taxes impact decisions made by the employers and employees.

Suggested Citation

  • Aleksander Welfe & Piotr Keblowski, 2006. "Price-Wage System with Taxation: Multivariate Cointegration Analysis," Working Papers 13, Department of Applied Econometrics, Warsaw School of Economics.
    • Handle: RePEc:wse:wpaper:13
    as

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    File URL: http://kolegia.sgh.waw.pl/pl/KAE/struktura/IE/struktura/ZES/Documents/Working_Papers/aewp06-06.pdf
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    References listed on IDEAS

    as
    1. Welfe, Aleksander, 2000. "Modeling inflation in Poland," Economic Modelling, Elsevier, vol. 17(3), pages 375-385, August.
    2. Greenslade, Jennifer V. & Hall, Stephen G. & Henry, S. G. Brian, 2002. "On the identification of cointegrated systems in small samples: a modelling strategy with an application to UK wages and prices," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1517-1537, August.
    3. Helmut Lütkepohl & Pentti Saikkonen & Carsten Trenkler, 2001. "Maximum eigenvalue versus trace tests for the cointegrating rank of a VAR process," Econometrics Journal, Royal Economic Society, vol. 4(2), pages 1-8.
    4. Cross,Rod Preface by-Name:Blanchard,Olivier (ed.), 1995. "The Natural Rate of Unemployment," Cambridge Books, Cambridge University Press, number 9780521483308, January.
    5. Stephen G. Hall & Jennifer V. Greenslade & S. G. Brian Henry, 1999. "On the Identification of Cointegrated Systems in Small Samples: Practical Procedures with an Application to UK Wages and Prices," Computing in Economics and Finance 1999 643, Society for Computational Economics.
    6. Keblowski, Piotr & Welfe, Aleksander, 2004. "The ADF-KPSS test of the joint confirmation hypothesis of unit autoregressive root," Economics Letters, Elsevier, vol. 85(2), pages 257-263, November.
    7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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