My research considers four broad issues.
- The negative long-run relationship between inflation
and the markup
A detailed overview of this topic can be found in:
Bill Russell (2006). Non-Stationary Inflation and the Markup: an Overview of the Research and some Implications for Policy, Dundee Discussion Papers, Department of Economic Studies, University of Dundee, August, No. 191.
There are three parts to this research. The first is the theoretical basis of the negative relationship between inflation and the profitability of firms. I argue that it is difficult for firms to coordinate changes in prices in an inflationary environment and so firms adjust prices cautiously and with a lag to avoid the costs of coordination failure. This results in firms accepting lower profits while adjusting prices. I propose that the uncertainty surrounding the changing of prices is not of the sort that disappears when inflation is stable and that permanently higher inflation will permanently lower the profitability of firms.
The second part of the research is the empirical identification of the negative relationship between inflation and the markup of price on unit costs (a proxy for profitability). The research focuses on data for a wide range countries, frequencies, and levels of aggregation. This work demonstrates that it is easy to identify the negative relationship and that the relationship can be characterized as ‘long-run’ in nature. This empirical research is primarily undertaken with Professor Anindya Banerjee of the European University Institute and the University of Oxford.
The third part of the research considers the policy implications of the inflation-markup relationship.
- Estimating Phillips curves
This research argues that because inflation is non-stationary the standard empirical estimates of Phillips curves are mostly invalid and imprecise. Consequently, the standard approach is not suitable for determining whether or not the long-run Phillips curve is vertical or not. Using estimating techniques that allow for the non-stationarity in the data we identify a small but significant positive slope to the long-run Phillips curve.
- General empirical macroeconomics
The third area of interest is empirical macroeconomics and looks at price and wage inflation, employment, the impact of share prices on the Australian business cycle and the role of exports in transmitting foreign business cycles between countries.
- Modeling coffee prices
The modeling of coffee prices recognises that changes in government policies over the years leads to changes in the ratio of the producer price of coffee over the terminal price of coffee. Consequently, to model coffee prices successfully using a cointegration analysis or an error correction model requires these changes in the coffee price ratio to be accounted for. If not then the estimated models will be biased and lead to incorrect inference. This modeling approach allows the identification of the long-run producers share of the terminal price of coffee and thereby allows the identification of the losses experienced by producers over the years as a result of different government policies.