Modelling Traded, Non‐traded and Aggregate Inflation in a Small Open Economy: The Case of Ireland

Geoff Kenny and Donal McGettigan

Manchester School, 1999, vol. 67, issue 1, 60-88

Abstract: This paper addresses the unresolved issues surrounding the determination of Irish inflation. The study tests the validity of (i) a pure wage mark‐up model, (ii) a pure small open economy model and (iii) a hybrid model which fuses elements of (i) and (ii) over the period 1979Q1–1995Q3. Multivariate cointegration techniques are employed to clearly distinguish the long‐run and short‐run information in the data. The results highlight the relevance of the distinction between traded and non‐traded prices. For traded prices, full purchasing power parity (PPP) was found to be consistent with the data. In the case of non‐traded prices, the data reject strict long‐run PPP. Aggregate price results occupy an intermediate position. Finally, we demonstrate that strong bi‐directional feedback exists between prices and wages.

Date: 1999
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