Does product market competition reduce inflation? Evidence from EU countries and sectors

Marcin Przybyla and Moreno Roma

No 453, Working Paper Series from European Central Bank

Abstract: In this paper we explore the link between the intensity of product market competition and inflation rates across EU countries and sectors. We consider long-term averages of inflation rates in order to remove the cyclical behavior of inflation over time and as alternative proxies of competition we use the level of mark-up, profit margin, the profit rate and a survey based "intensity of competition" variable. Results for both aggregate and sectoral panels show that the extent of product market competition, as proxied by the level of mark-up in particular, is an important driver of inflation. Notwithstanding some caveats associated with the measurement of the proxies of competition used, our findings suggest that higher product market competition reduces average inflation rates for a prolonged period of time. Moreover, results both at the aggregate and sectoral level are generally confirmed by a wide set of robustness tests. JEL Classification: C21, C23, E31

Keywords: competition; Estimation and Panel Data Analysis; inflation (search for similar items in EconPapers)
Date: 2005-03
Note: 475547
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2005453

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