Does Product Market Competition Reduce Inflation? Evidence from EU Countries and Sectors

45 Pages Posted: 6 May 2005

See all articles by Marcin Przybyla

Marcin Przybyla

European Central Bank (ECB)

Moreno Roma

European Central Bank (ECB)

Date Written: March 2005

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.

Keywords: Inflation, Competition, Estimation and Panel Data Analysis

JEL Classification: C21, C23, E31

Suggested Citation

Przybyla, Marcin and Roma, Moreno, Does Product Market Competition Reduce Inflation? Evidence from EU Countries and Sectors (March 2005). Available at SSRN: https://ssrn.com/abstract=676404 or http://dx.doi.org/10.2139/ssrn.676404

Marcin Przybyla (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Moreno Roma

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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