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Price Formation in an Open Economy: Theory and Evidence for the United Kingdom, 1951-1991

Christopher Martin
The Economic Journal
Vol. 107, No. 444 (Sep., 1997), pp. 1391-1404
Published by: Wiley on behalf of the Royal Economic Society
Stable URL: http://www.jstor.org/stable/2957742
Page Count: 14
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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.

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