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

Authors


  • We are grateful to two anonymous referees and the editor for very helpful comments and suggestions on a previous draft. We also thank participants to the BBVA Economic Research Department Seminar Series, the XIIIth Applied Economics Meetings, Seville, June 2010, and the XXXVth Spanish Economic Association Annual Conference, Madrid, December 2010, for useful remarks. The usual disclaimer applies.

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.

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