Product Market Competition, Monetary Policy Regimes and Inflation Dynamics: Evidence from a Panel of OECD Countries

Abstract

We empirically analyze the impact of product market competition on the responsiveness of inflation to macroeconomic imbalances. If competition is high the response of inflation to lagged inflation, unemployment and import prices is reduced, while inflation is more responsive to changes in productivity growth in countries in which competition is above the OECD average. Given the ('good luck') macroeconomic trajectories of the 1990s-2000s, the structural reforms that made goods markets more competitive improved the ability of OECD economies to smooth (dis)inflationary shocks, while changes in the monetary policy framework had a modest role in taming inflation during the Great Moderation.

Determinants of Inflation in the Euro Area: The Role of Labor and Product Market Institutions

“…To examine more formally the role of labor and product market institutions in explaining inflation, the paper uses a traditional backward-looking Phillips curve framework, in line with Bowdler and Nunziata (2007), Biroli et al (2010) and Correa-López et al (2010). In this model, inflation is a function of its own lag (to capture persistence), the initial relative price level, the output gap, changes in the nominal effective exchange rate, time dummies (to capture common shocks such as an oil price or monetary policy shock), and country fixed effects (that proxy for differences across countries in the long-run price levels).…”

“…Andersson et al (2010) augments the traditional determinants of inflation with product market regulation and shows that inflation differentials in the euro area are to some extent driven by changes in product market regulations and wage growth differentials. Correa-López et al (2010) examine the impact of labor and product market institutions on the persistence of inflation and its responsiveness to traditional determinants. They find that higher product market regulation raises inflation persistence and reduces the responsiveness of inflation to changes in productivity growth.…”

Economic factors influencing the dynamics of unemployment in the G10 countries: empirical evidence from panel data modeling

“…Moreover, we can infer that growth in the aggregate demand may lead to a push in the demand for labor in the G10 countries, which in turn may increase the real wage and promote an increase in the labor supply. We can interpret the institutional environment of goods market, goods market frictions, degree of unionization in the labor market, labor market frictions and financial frictions as crucial factors to explain the dynamics of labor markets, in line with Ciccarone et al (2014), Correa-Lopez et al (2014) and Mandelman and Zanetti (2014). Despite the increases in the inflation rate lowering the real wage and thus decreasing the labor supply, we estimate that the inflation rate positively affects the employment in the G10 countries, parallel to the outcome of studies refuting the validity of the NKPC (Martins and Gabriel, 2009;Mazumder, 2011).…”

Inflation Dynamics in a Model with Firm Entry and (Some) Heterogeneity

“…These probabilities are relatively similar to the empirical ones (in brackets in Table 2). 13 As can be seen from column 2 in the RHS panel of Table 3, the productivity gap in the data is too large for this model, so that low productivity firms are far too small in size and represent an almost insignificant proportion of total employment (0.1%) and production (0.03%). This can be circumvented in two ways.…”