Price formation in an open economy: Theory and evidence for the United Kingdom, 1951-1991

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Abstract

Price formation is an increasingly important part of modern macroeconomics. However, the empirical literature on price-setting is diverse and confused. This paper uses cointegration techniques to test theories of price-setting on UK aggregate data for 1951-91. We find: (i) domestic prices are determined by both domestic costs and world prices and (ii) at the macroeconomic level, prices are related to marginal cost rather than average or normal cost.

Original languageEnglish
Pages (from-to)1391-1404
Number of pages14
JournalEconomic Journal
Volume107
Issue number444
DOIs
Publication statusPublished - 1 Sep 1997

ASJC Scopus subject areas

  • Economics and Econometrics

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